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on European Economics |
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Issue of 2013‒01‒07
fifteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Domenico Giannone (ECARES – European Center for Advanced Research in Economics and Statistics; CEPR - Centre for Economic Policy Research); Michele Lenza (European Central Bank); Huw Pill (Goldman Sachs); Lucrezia Reichlin (London Business School; CEPR - Centre for Economic Policy Research) |
| Abstract: | We analyse the impact on the euro area economy of the ECB’s non-standard monetary policy measures by studying the effect of the expansion of intermediation of interbank transactions across the central bank balance sheet. We exploit data drawn from the aggregated Monetary and Financial Institutions (MFI) balance sheet, which allows us to construct a measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find small but significant effects both on loans and real economic activity. JEL Classification: E5, E58 |
| Keywords: | Non-standard monetary policy measures, interbank market |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121496&r=eec |
| By: | Óscar Arce (Directorate General Economics, Statistics and Research, Bank of Spain); Sergio Mayordomo (School of Economics and Business Administration, University of Navarra); Juan Ignacio Peña (Department of Business Administration, Universidad Carlos III de Madrid) |
| Abstract: | We analyse the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the current crisis of the European Monetary Union (EMU). We first document that deviations between CDS and bond spreads are related to counterparty risk, common volatility in EMU equity markets, market illiquidity, funding costs, flight-to-quality, and the volume of debt purchases by the European Central Bank (ECB) in the secondary market. Based on this we conduct a state-dependent price-discovery analysis that reveals that the levels of the counterparty risk and the common volatility in EMU equity markets, and the banks’ agreements to accept losses on their holdings of Greek bonds impair the ability of the CDS market to lead the price discovery process. On the other hand, the funding costs, the flight-to-quality indicator and the volume of debt purchases by the ECB worsen the efficiency of the bond market. |
| Keywords: | sovereign credit default swaps, sovereign bonds, credit spreads, price discovery |
| JEL: | G10 G14 G15 |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp2212&r=eec |
| By: | Antonakakis, Nikolaos; Vergos, Konstantinos |
| Abstract: | In this paper we examine the linkages of government bond yield spreads (BYS) between Euro zone countries over the period March 3, 2007 - June 18, 2012, thus considering the intriguing features of BYS spillovers during the global financial and the Euro zone debt crisis. Splitting our sample to Euro zone periphery and core countries, and using the VAR-based spillover index approach of Diebold and Yilmaz (2012), we find that: (i) on average, BYS shocks tend to increase future BYS, and are related to news announcements and policy changes; (ii) BYS spillovers between Euro zone countries are highly intertwined, originating mostly from the periphery (Greece, Ireland, Italy, Portugal and Spain (GIIPS)) and to a lesser extent from the core (Austria, Belgium, France and Netherlands (ABFN)). The within-effect of BYS spillovers is of greater magnitude within the periphery than that within the core; iv) The between-effect (core vs periphery) of BYS spillovers suggests directional spillovers of greater magnitude from the periphery to the Euro zone core than vice-versa. Generalized impulse response analyses provide additional support to these findings. Our findings highlight the increased vulnerability of Euro zone from the destabilizing shocks originating from the beleaguered Euro zone countries in the periphery. |
| Keywords: | Government bond yield spread; Euro Zone debt crisis; Spillover; Vector autoregression;p Variance decomposition; Impulse response |
| JEL: | C32 G11 G12 G15 H63 G01 |
| Date: | 2012–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43284&r=eec |
| By: | António Afonso; Michael G. Arghyrou; Alexandros Kontonikas |
| Abstract: | We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, unlike the period preceding the global financial crisis, European government bond yield spreads are wellexplained by macro- and fiscal fundamentals over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including the risk of the crisis’ transmission among EMU member states, international risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited. JEL Classification: C23, E62, H50. |
| Keywords: | sovereign yields, government debt, panel analysis, credit ratings |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp362012&r=eec |
| By: | Renaud Beaupain (IÉSEG School of Management; Lille Economie & Management - LEM-CNRS (U.M.R. 8179)); Alain Durré (European Central Bank; IÉSEG School of Management; Lille Economie & Management - LEM-CNRS (U.M.R. 8179)) |
| Abstract: | The market-oriented approach promoted by the European Central Bank in the design of its refinancing operations creates incentives to credit insitutions to use actively the interbank market to manage their liquidity needs. In this context, we examine the ability of the overnight segment to guarantee the timely provision of unsecured funds to banks to smoothly absorb their liquidity shocks. This paper specifically focuses on the speed of reversion of transaction costs and available depth to their equilibrium levels in this market for overnight unsecured funds from 4 September 2000 to 31 December 2007. The reported evidence points to time-varying liquidity adjustments and identifies liquidity, market activity and the institutional setting of the ECB’s refinancing operations as significant determinants of the observed resiliency regimes. Our analysis also shows how the speed of mean reversion of market liquidity, by affecting the level and the volatility of the overnight market rate, also affects the anchoring of the yield curve in the euro area. JEL Classification: C22, C25, G01, G10, G21, E52 |
| Keywords: | Overnight money market, market microstructure, transaction costs, price impact, mean reversion, financial turmoil |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121500&r=eec |
| By: | Laurent Maurin (European Central Bank); Mervi Toivanen (Bank of Finland) |
| Abstract: | We develop a partial adjustment model in order to estimate the factors contributing to banks’ internal target capital ratio, lending policy and holding of securities. The model is estimated on a panel of listed euro area banks and country specific macrovariables. Firstly, banks’ internal target capital ratios are estimated by using information on banks’ riskiness and earnings capacity. Secondly, the impact of banks’ capital gap on the credit supply and the security portfolio is estimated while controlling for the macroeconomic environment. An increase in bank’ balance sheet risk is shown to increase the target capital ratios. The adjustment towards higher equilibrium capital ratios has a significant impact on banks’ assets. The impact is found to be more sizeable on security holdings than on loans, thereby suggesting a pecking order. JEL Classification: G21 |
| Keywords: | Banks, euro area, capital ratios, credit supply, partial adjustment model |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121499&r=eec |
| By: | Gunter Coenen; Roland Straub; Mathias Trabandt |
| Abstract: | We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditure-based fiscal stimulus measures, the total multiplier is below unity. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1061&r=eec |
| By: | Robert J. Barbera; Gerald Holtham |
| Abstract: | Financial market crises with the threat of a subsequent debt-deflation depression have occurred with increasing regularity in the United States from 1980 through the present. Almost reflexively, when confronted with such circumstances, US institutions and the policymakers that run them have responded in a fashion that has consistently thwarted debt-deflation-depression dynamics. It is true that these "remedies," as they succeeded, increasingly contributed to a moral hazard in US and global financial markets that culminated with the crisis that began in 2007. Nonetheless, the straightforward steps taken by established institutions enabled the United States to derail depression dynamics, while European 1930s-style austerity proved as ineffective as it was almost a century ago. Europe's, and specifically Germany's, steadfast refusal to embrace the US recipe has fostered mushrooming economic hardship on the continent. The situation is gruesome, and any serious student of economic history had to have known, given European policy commitments, that it was destined to turn out this way. It is easy to understand why misguided policies drove initial European responses. Economic theory has frowned on Keynes. Economic successes, especially in Germany, offered up the wrong lessons, and enduring angst about inflation was a major distraction. At the outset, the wrong medicine for the wrong disease was to be expected. What is much harder to fathom is why such a poisonous elixir continues to be proffered amid widespread evidence that the patient is dying. Deconstructing cognitive dissonance in other spheres provides an explanation. Not surprisingly, knowing what one wants to happen at home completely informs one’s claims concerning what will be good for one’s neighbors. In such a construct, the last best hope for Europe is ECB President Mario Draghi. He seems to be able to speak German and yet act European. |
| Keywords: | Austerity; Central Banks; Economic Stability; Euro; European Central Bank; Eurozone; Eurozone Debt Crisis; Financial Crisis; Financial Instability; Financial Markets; Fiscal Policy; Government Policy and Regulation; Hyman Minsky; Sovereign Debt; Stabilization; United States |
| JEL: | B20 B31 E62 E63 E65 F01 F36 G01 H63 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_742&r=eec |
| By: | Dieter Gerdesmeier (European Central Bank); Andreja Lenarčič (Bocconi University; Bank of Slovenia); Barbara Roffia (European Central Bank) |
| Abstract: | The main aim of this paper is to apply a method based on fundamentals ─ which has already been applied in the stock market analysis ─ to detect boom/bust in the housing market, with a focus on the euro area. In this context, an underlying model is developed and tested. It turns out that the user cost rate, a demographic variable, the unemployment rate, disposable income (or disposable income per capita), the debt-to-income ratio and, finally, the housing stock are fundamental variables which significantly explain house price developments. Booms and busts are then selected as episodes when the house price index deviates excessively from the levels which would be implied by these economic fundamentals. In addition, a cross-check of the boom/bust episodes based on this method and other statistical and fundamental ones is carried out in order to substantiate the results obtained. Finally, money and credit aggregates are included in the specifications and are found to be useful in explaining boom/busts cycles in house prices. JEL Classification: E37, E44, E51 |
| Keywords: | House prices, booms, busts, quantile regressions, monetary and credit aggregates |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121493&r=eec |
| By: | Linda Gonçalves Veiga (Universidade do Minho - NIPE) |
| Abstract: | This paper examines if the European integration process, by transferring policy instruments to supra-national authorities, has affected voters’ evaluations of governments’ economic performance at electoral periods. The analysis is implemented on a panel of 15 EU countries, from 1970 to 2011. Results suggest that before the Maastricht Treaty, citizens held incumbents responsible for GDP growth, and for the evolution of inflation, particularly when measured relative to the EU average. After the Maastricht Treaty, only fiscal policy variables show up as statistically significant. The capacity to control the budget deficit appears as the main determinant of electoral results, especially during the current economic crisis. |
| Keywords: | Vote functions, EU-15, economics, deficits |
| JEL: | H6 D72 E6 F02 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:16/2012&r=eec |
| By: | Claudio, Vicarelli; Carmine, Pappalardo |
| Abstract: | Recent literature has focused on the importance of extensive and intensive margins of trade in the case of the Euro adoption. Using a unique dataset taken from ISTAT firm level data, we study the effects of euro introduction on Italian manufacturing firms. We focus our analysis on the period 1996-2004, covering three years before and six years after the euro introduction. We estimate a gravity equation using difference-in difference estimation techniques. Firm-level evidence shows that the euro had indeed a positive influence on Italian exports, mainly channelled through the intensive margin, whereas the extensive margin was not significantlyimportant. This result suggests that the positive effect of euro introduction on trade flows is essentially owed to a reduction of variable trade costs. The reduction of fixed-entry costs would have a role, allowing the entry of new exporting firms in foreign markets. However, these latter are smaller and less productive and exporting a small number of products; as a result, their contribution to total export value is quite low. This result seems in line with the well known stylised fact on small average size of Italian firms. The lower is the average firm size, the lower is the probability to benefit of a downward shift of fixed entry costs in foreign markets induced by the common currency. |
| Keywords: | Trade; Euro; Export Margins; Instrumental variables; |
| JEL: | F15 C23 F14 C21 |
| Date: | 2012–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43386&r=eec |
| By: | Vítor Castro (Universidade de Coimbra - NIPE) |
| Abstract: | In this paper, we analyse the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions and to which, on this matter, the literature has not given a particular attention yet. Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results. |
| Keywords: | Credit risk; Macroeconomic factors; Banking system; GIPSI; Panel data |
| JEL: | C23 G21 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:11/2012&r=eec |
| By: | Trapp, Monika; Wewel, Claudio |
| Abstract: | In this paper we study systemic risk for North America and Europe. We show that banks' exposures to common risk factors are crucial for systemic risk. We come to this conclusion by first showing that relations between North American and European banks are smaller than within each region. We then show that European banks react more strongly to the onset of the financial crisis than North American ones. Regarding the consequences of systemic risk, we show that dependence between the banking sector and a wide range of real sectors is limited. Our results imply that regulators and supervisors should address international bank dependencies arising from common risk factors, while recessions in real sectors due to bank defaults should be a secondary concern. -- |
| Keywords: | systemic risk,banking sector,real sectors,international,copula |
| JEL: | G01 G15 G18 G21 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1210&r=eec |
| By: | António Afonso; João Tovar Jalles |
| Abstract: | We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration – absence of sustainability – between government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings. JEL Classification: C32, E62, H62, H63 |
| Keywords: | debt, primary balance, fiscal regimes, stationarity, breaks, causality, panel cointegration, FMOLS |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp292012&r=eec |
| By: | Laurence Ball; Daniel Leigh; Prakash Loungani |
| Abstract: | This paper asks how well Okun's Law fits short-run unemployment movements in the United States since 1948 and in twenty advanced economies since 1980. We find that Okun's Law is a strong and stable relationship in most countries, one that did not change substantially during the Great Recession. Accounts of breakdowns in the Law, such as the emergence of "jobless recoveries," are flawed. We also find that the coefficient in the relationship-the effect of a one percent change in output on the unemployment rate-varies substantially across countries. This variation is partly explained by idiosyncratic features of national labor markets, but it is not related to differences in employment protection legislation. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:606&r=eec |