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on European Economics |
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Issue of 2016‒10‒16
fourteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Pia Hüttl; Dirk Schoenmaker |
| Abstract: | During the global financial crisis and subsequent euro-debt crisis, the fiscal resources of some countries appeared to be insufficient to support their banking systems. These countries needed outside support to stabilise their banking systems and thereby their wider economies. This Policy Contribution assesses the potential fiscal costs of recapitalising large banks. Based on past financial crises, we estimate that the cost to recapitalise an individual bank amounts to 4.5 percent of its total assets. During a severe crisis, a country might have to recapitalise up to three of its large systemic banks. We assume that bail-in of private investors is not fully possible during a systemic crisis. Our empirical findings suggest that large countries, such as the United States, China and Japan, can still provide credible fiscal backstops to their large systemic banks. In the euro area, the potential fiscal costs are unevenly distributed and range from 4 to 12 percent of GDP. Differences in the strengths of the fiscal backstops in euro-area countries contribute to divergences in financing conditions across the banking union. To counter this fragmentation, we propose that the European Stability Mechanism (ESM) could be used as a fiscal backstop to recapitalise systemically important banks directly within the banking union, in the case of a severe systemic crisis. But this would be only a last resort, after other tools such as bail-in have been used to the maximum extent possible. The governance of the ESM should be reconsidered, to ensure swift and clear application in times of crisis. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:16765&r=eec |
| By: | Blesse, Sebastian; Boyer, Pierre C.; Heinemann, Friedrich; Janeba, Eckhard |
| Abstract: | The Brexit referendum and the decision of British voters to leave the EU have sparked a comprehensive debate on the future of European integration. A key issue in this debate is the appropriate division of responsibilities between the EU and its Member States. The EU might still lack certain competencies which are crucial for a functioning Union or resilient euro area. At the same time, however, some of the EU's existing competencies might be better allocated to Member States. This policy brief documents results from a survey on the future of European integration conducted in the national parliaments of both France and Germany, including the French Sénat, the Assemblée Nationale and the German Bundestag, between April and July 2016. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewpbs:52016&r=eec |
| By: | Javier J. Pérez (Banco de España); Marie Aouriri (Banque de France); Maria M. Campos (Banco de Portugal); Dmitrij Celov (Bank of Lithuania); Domenico Depalo (Banca d’Italia); Evangelia Papapetrou (Bank of Greece); Jurga Pesliakaite (Bank of Lithuania); Roberto Ramos Magdaleno (Banco de España); Marta Rodríguez-Vives (European Central Bank) |
| Abstract: | This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. |
| Keywords: | public employment, public wages, labour market, fiscal policies, fiscal consolidation |
| JEL: | H50 E62 J45 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1607&r=eec |
| By: | Adrian van Rixtel (Banco de España); Luna Romo González (Banco de España); Jing Yang (Bank of Canada) |
| Abstract: | This paper is one of the first to investigate the determinants of bond issuance by European banks. We use a unique database of around 50,000 bonds issued by 63 banks from 14 European countries to test explicitly a broad set of hypotheses on the drivers of bond issuance. The sample covers the two major financial crises that caused severe dislocations in bank funding structures, i.e. the global financial crisis of 2008-2009 and the euro area financial crisis of 2010-2012. Our findings suggest that “market timing” (low interest rates) drove issuance before but not during the crisis, when access to funding became more important than its cost. Moreover, during the crisis years, country-risk characteristics became drivers of bond issuance, while for banks from the euro area periphery central bank liquidity substituted for unsecured long-term debt. We also show that heightened financial market tensions were detrimental to bond issuance, and more strongly so during crisis episodes. We find evidence of “leverage targeting” by means of the issuance of long-term debt during the crisis years. The positive and significant coefficient for the capital ratio supports the “risk absorption” hypothesis, suggesting that larger capital buffers enhanced the risk-bearing capacity of banks and allowed them to issue more debt. Moreover, banks with deposit supply constraints and relatively large loan portfolios issued more bonds, both before and after the crisis years. We find, too, that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued unsecured debt in particular, while weaker banks resorted more to issuance of covered bonds. Overall, our results suggest that stronger banks – including those from peripheral countries – maintained better access to longer-term funding markets, even during crisis periods. |
| Keywords: | bank funding, bond issuance, banking crisis, Europe |
| JEL: | G21 G32 E44 E58 F3 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1621&r=eec |
| By: | Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CES, Munich, Germany; IOS, Regensburg, Germany); Michala Moravcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an Event Study Methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcements matters, (iii) the type of announcement also matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, and (viii) temporary inefficiencies are present on the new-EU-country forex markets. |
| Keywords: | foreign exchange markets; intraday data; abnormal returns; event study; macroeconomic announcements; monetary policy settings; European Union; new EU members |
| JEL: | C52 F31 F36 G15 P59 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2016_20&r=eec |
| By: | Alessi, Lucia; Kerssenfischer, Mark |
| Abstract: | Mainstream macroeconomic theory predicts a rapid response of asset prices to monetary policy shocks, which conventional empirical models are unable to reproduce. We argue that this is due to a deficient information set: Forward-looking economic agents observe vastly more information than the handful of variables included in standard VAR models. Thus, small-scale VARs are likely to suffer from nonfundamentalness and yield biased results. We tackle this problem by estimating a Structural Factor Model for a large euro area dataset. We find quicker and larger effects of monetary policy shocks, consistent with mainstream theory and the observed large swings in asset prices. Our results point to stronger financial stability consequences of an exogenous monetary policy tightening, also in the form of a quicker than expected unwinding of QE, than commonly thought. JEL Classification: C32, E43, E44, E52 |
| Keywords: | Asset Prices, Monetary Policy, Nonfundamentalness., Structural Factor Models |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161967&r=eec |
| By: | Anna Batyra (Bogazici University); David de la Croix (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Olivier Pierrard (Banque centrale du Luxembourg); Henri Sneessens (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Université du Luxembourg, CREA) |
| Abstract: | The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. Contrary to a purely neoclassical framework, a model with imperfectly competitive labor market also allows to consider the effect of the bargaining power of labor and matching efficiency on preretirement. We find that lower bargaining power of workers and less efficient labor markets characterized by the declining matching efficiency have been an important determinant of early retirement in France and Germany. These structural changes, combined with early-retirement transfers and population ageing, are also consistent with the joint evolution of employment and unemployment rates, the labor share and the seniority premium. |
| Keywords: | Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Labor Market Policy and Institutions |
| JEL: | E24 H55 J26 J64 |
| Date: | 2016–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2016022&r=eec |
| By: | Francisco Martí (Banco de España); Javier J. Pérez (Banco de España) |
| Abstract: | Spain’s public finances have been under significant stress during the crisis, despite pre-crisis fiscal surpluses and low levels of public debt. The impact of the crisis and an initial phase of counter-cyclical activism exacerbated the existing (structural) fiscal vulnerabilities. To correct the fiscal imbalances, a significant number of bold policy actions were taken, affecting taxation, public spending, national fiscal rules and the structure of the public sector. In this paper we discuss the evolution of public finances in Spain during the financial crisis, framing crisis-related fiscal policy measures within medium-term economic trends and focusing on policy responses to the financial crisis. We also touch upon the main policy challenges ahead. |
| Keywords: | fiscal policy, Great Recession, public deficit, public debt, Spanish economy |
| JEL: | E60 H12 H50 H60 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1620&r=eec |
| By: | Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu. |
| Keywords: | money demand,open economy model,currency substitution,Romania |
| Date: | 2016–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01361214&r=eec |
| By: | Sajedi, Rana (Bank of England) |
| Abstract: | Given the weak economic performance of many countries since the recent crisis, there is an increasing need for structural reforms aimed at promoting long-run economic growth. Structural reforms can entail short-run output costs unless offset by a demand expansion. When monetary policy is constrained and cannot carry out this short-run expansion, there is a potential role for fiscal policy. In this case, reforms can go against fiscal consolidation in the short run, although they are expected to improve public finances in the long run. The aim of this paper is to quantify the short-run fiscal costs and long-run fiscal benefits of reforms, and investigate how the design of reforms can affect this trade-off. The focus is on the euro area, which has been particularly affected by high unemployment. In the model, both the costs and benefits of reforms are generally small, although increasingly large reforms entail larger rises in deficit-to-GDP in the short run. Results suggest that reforms in labour markets have little effect on public finances in the long run, but their short-run costs can be ameliorated by combining them with product market reforms. |
| Keywords: | Structural reform; fiscal policy; effective lower bound |
| JEL: | E65 H20 H63 |
| Date: | 2016–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0620&r=eec |
| By: | Yassine Bakkar (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société) |
| Abstract: | We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before (2000-2006), during (2007-2009) and after (2010-2013) the global financial crisis. Prior to the crisis bank charter value is positively associated withrisk-taking and systemic risk for very large ―too-big-too-fail‖ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' Business models also influence this relationship. In presence of strong diversification strategies, higher charter value increases standalone risk for very large banks. Conversely, for banks following a focus strategy, higher charter value amplifies systemic risk for very large banks and both standalone and systemic risk for large U.S. and European banks. Abstract We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before (2000-2006), during (2007-2009) and after (2010-2013) the global financial crisis. Prior to the crisis bank charter value is positively associated withrisk-taking and systemic risk for very large ―too-big-too-fail‖ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' Business models also influence this relationship. In presence of strong diversification strategies, higher charter value increases standalone risk for very large banks. Conversely, for banks following a focus strategy, higher charter value amplifies systemic risk for very large banks and both standalone and systemic risk for large U.S. and European banks. |
| Keywords: | Systemic risk,Standalone risk,Charter value,Bank strategies,Too-big-too-fail,Global financial crisis,Bank regulation |
| Date: | 2016–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01337601&r=eec |
| By: | Timothy J. Goodspeed |
| Abstract: | In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. Given that the EU has established rules limiting deficits, national rainy-day funds could in theory provide a way for countries to obey the rules and use fiscal policy, yet avoid using austerity measures during a recession. The rainy-day fund is self-insurance and we examine the funding of a national rainy-day fund for a country in isolation. We then introduce a fiscal union while allowing member countries to retain some fiscal policy control. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members’ rainy day funds. |
| Keywords: | fiscal union, fiscal transfers, federation, rainy-day funds, fiscal stabilization |
| JEL: | E6 H1 H6 H7 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:gov:wpaper:1606&r=eec |
| By: | Francesco Columba (Bank of Italy); Jaqian Chen (IMF) |
| Abstract: | We analyse the effects and the interactions of macroprudential and monetary policies with an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households are constrained by a loan-to-value ratio and mortgages are amortized. Government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that to curb the household debt-to-income ratio demand-side macroprudential measures are more effective and less costly in terms of foregone consumption than monetary policy. A tighter macroprudential stance is also welfare improving, by promoting lower consumption volatility in response to shock, especially when combining different instruments, whose sequence of implementation is key. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:913&r=eec |
| By: | Claudiu Tiberiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | The aim of this paper is to investigate the degree of currency substitution between the currencies of CEE countries and the euro. As a novelty, we develop a model with microeconomic foundations, which underlines the difference between the currency substitution and the money demand sensitivity to exchange rate variations. More precisely, we posit that the currency substitution is related to themoney demand sensitivity to the interest rate spread between the CEE countries and the euro area. In addition, we showthat the existence of a channel throughout the exchange rate has implications on the money demand, even in the absence of a currency substitution effect. This model can be successfully applied to countries where an international currency offers liquidity services to the domestic agent, and where afterwards it is parameterized in order to empirically test the long-run money demand based on two complementary cointegration equations. The opportunity cost of holding the money, as well as the scale variable represented by household consumption or output, explain the long-run money demand in CEE countries. Our results are robust regarding the use of DOLS or FMOLS estimators, andregarding the employment of the broad and the narrow money for computing the money demand. |
| Keywords: | CEE countries ,cointegration,open economy model,currency substitution,money demand |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01348842&r=eec |