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on European Economics |
| By: | Valiante, Diego |
| Abstract: | Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:8882&r=eec |
| By: | Juan Carlos Conesa; Timothy J. Kehoe |
| Abstract: | In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end. |
| JEL: | F34 F53 G01 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19909&r=eec |
| By: | Irma Hindrayanto; Siem Jan Koopman; Jasper de Winter |
| Abstract: | Many empirical studies show that factor models have a relatively high forecast compared to alternative short-term forecasting models. These empirical findings have been established for different data sets and for different forecast horizons. However, choosing the appropriate factor model specification is still a topic of ongoing debate. Moreover, the forecast performance during the recent financial crisis is not well documented. In this study we investigate these two issues in depth. We empirically test the forecast performance of three factor model approaches and report our findings in an extended empirical out-of-sample forecasting competition for the euro area and its five largest countries over the period 1992-2012. Besides, we introduce two extensions to the existing factor models to make them more suited for real-time forecasting. We show that the factor models were able to systematically beat the benchmark autoregressive model, both before as well as during the financial crisis. The recently proposed collapsed dynamic factor model shows the highest forecast accuracy for the euro area and the majority of countries we analyzed. The improvement against the benchmark model can range up to 77%, depending on the country and forecast horizon. |
| Keywords: | Factor models; Principal component analysis; Forecasting, Kalman filter; State space method; Publication lag; Mixed frequency |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:415&r=eec |
| By: | Sabine Herrmann (Deutsche Bundesbank); Joern Kleinert (University of Graz) |
| Abstract: | This paper examines the Lucas Paradox and the Allocation Puzzle of international capital flows referring to a panel data set of EMU countries and major industrialized and emerging economies. Overall, the results do not provide evidence in favour of the Lucas Paradox and the Allocation Puzzle. Rather, in line with neoclassical expectations, net capital flows are allocated according to income and growth differentials. The “downhill” flow of capital from rich to poor economies was particularly pronounced in intra-euro area capital flows and after the introduction of the common currency. If we control for the fact that the assumptions of the neoclassical model are not perfectly given in emerging markets, the Lucas Paradox and the Allocation Puzzle can be dismissed for these countries too. However, in periods of financial stress, the neoclassical behaviour of financial flows is to some extent dampened. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2014-01&r=eec |
| By: | Zsolt Darvas; André Sapir; Guntram B. Wolff |
| Abstract: | Countries can make a clean exit from financial assistance, or enter a new programme or a precautionary programme, depending on the sustainability of their public debt and their vulnerability to shocks. Ireland made a clean exit in December 2013, supported by significant budgetary and current-account adjustment and signs of economic recovery. But Irish debt sustainability is not guaranteed and prudence will be needed to avoid future difficulties. A clean exit for Portugal is not recommended when its programme ends in May 2014, because compared to Ireland it faces higher interest rates, has poorer growth prospects and has probably less ability to generate a consistently high primary surplus. A precautionary arrangement would be advisable. In case debt sustainability proves dif- ficult to achieve later, some form of debt restructuring may prove necessary. It is unlikely that Greece will be able to exit its programme in December 2014. A third programme should be put in place to take Greece out of the market until 2030, accompanied by enhanced budgetary and structural reform commitments by Greece, a European boost to economic growth in the euro-area periphery and willingness on the part of lenders to reduce loan charges below their borrowing costs, should public debt levels prove unsustainable despite Greece meeting the loan conditions. Even assuming all goes well, the three countries will be subject to enhanced post-pro- gramme surveillance for decades. Managing such long-term relationships will be a key challenge. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:816&r=eec |
| By: | Feyen, Erik; Letelier, Raquel; Love, Inessa; Maimbo, Samuel Munzele; Rocha, Roberto |
| Abstract: | This paper provides new evidence on the factors affecting protracted credit contraction in the wake of the global financial crisis. The paper applies panel vector autoregressions to a global panel that consists of quarterly data for 41 countries for the period 2000-2011 and documents that domestic private credit growth is highly sensitive to cross-border funding shocks around the world. This relationship is significantly stronger in Central and Eastern Europe, a region with considerably stronger foreign presence, higher cross-border funding, and elevated loan-to-deposit ratios compared with the rest of the world. The paper shows that high foreign ownership per se does not appear to explain credit response differences to foreign funding shocks. Rather, there is a stronger response in countries that exhibit high loan-to-deposit ratios and a high reliance on foreign funding relative to local deposits. The results suggest that funding model differences were at the heart of the post-crisis credit contraction in several Central and Eastern European countries. These findings have important regulatory and supervisory implications for emerging countries in Central and Eastern Europe as well as for other countries. |
| Keywords: | Bankruptcy and Resolution of Financial Distress,Access to Finance,Banks&Banking Reform,Economic Theory&Research,Deposit Insurance |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6783&r=eec |
| By: | Elisabeth Johansson-Nogués |
| Abstract: | A longstanding critique of the European Union has been its ‘hydra-headed’ external representation whereby multiple EU actors intervene to speak on the Union’s behalf in international organizations. Expectations were therefore raised as the 2009 Lisbon Treaty created a simplified regime of external representation whereby in essence the representation is left in the hands of the President of the European Council, the High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the European Commission and, finally, the President of the Commission. The question explored in this Working Paper is whether the 2009 Lisbon Treaty reform has since given rise to that cohesion and clarity of expression ("single voice") for which the EU and its member states allegedly strives. We survey this topic by ways of the EU´s external representation in the United Nations system and related conferences. Our main findings are that while it can be said that the ‘new’ troika has gained in formal representative ‘authority’, it has not been accompanied by greater independence of action or ‘autonomy’ from member states or by significant gains in terms of overall simplification of the Union’s external representation so far. |
| Keywords: | Lisbon Treaty |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:erp:euirsc:p0366&r=eec |
| By: | Biggs, Michael; Mayer, Thomas |
| Abstract: | Despite considerable differences, there were also many similarities in economic performance between Latvia and Greece before their respective adjustment crises. After the immediate crisis, however, economic activity rebounded sharply in Latvia but continued to contract in Greece. This paper argues that this difference was due primarily to developments in credit. In Latvia credit growth fell sharply, and the economy was deleveraging aggressively by 2009. When the pace of deleveraging started to stabilise, the rebound in the credit impulse caused domestic demand growth to recover. Real GDP has increased about 20% since reaching its trough in the third quarter of 2009. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:8922&r=eec |