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on European Economics |
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Issue of 2019‒05‒27
thirteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Niels Gilbert |
| Abstract: | We study the dynamics of sovereign risk spillovers from (and between) Spain and Italy, before and after the ECB's announcement of the OMT program. We identify domestic Italian and Spanish sovereign risk shocks through an intraday event study. The shocks are used as external instruments in bilateral, daily, local projection regressions. Prior to the announcement of the OMT, changes in the Spanish and, to a lesser extent, Italian spread spilled over to many other euro area member states, and also affected the euro-dollar exchange rate. Peak effects generally materialized after 2-3 days. Since the OMT announcement, spillovers to non-crisis, non-safe haven countries have disappeared. Some spillovers among crisis countries persist, but are smaller and shorter-lived than before. Overall, our results are consistent with the view that the OMT, through eliminating equilibrium multiplicity, has largely stopped contagion. |
| Keywords: | Sovereign risk; contagion; narrative identification; local projections; OMT |
| JEL: | C53 E44 F36 G01 G15 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:636&r=all |
| By: | Ettore Gallo (Department of Economics, New School for Social Research) |
| Abstract: | This paper reviews and empirically tests the validity and policy conclusions of the Sraffian Supermultiplier model (SSM) and the modified Neo-Kaleckian model after the inclusion of autonomous components of aggregate demand. First, we theoretically assess whether the SSM may constitute a complex variant of the Neo-Kaleckian model. In this sense, it is shown that results compatible with the SSM can be obtained by implementing a set of mechanisms in a modified Neo-Kaleckian model. Second, the paper empirically tests the main implications of the models in the Euro Area, based on Eurostat data. In particular, the discussion outlines the short and long-run relation between autonomous demand and output, by testing cointegration and causality with a VECM model. Moreover, the role accounted by both theories to the rate of capacity utilization is empirically assessed, through a time-series estimation of the Sraffian and Neo-Kaleckian investment functions. While confirming the theoretical relation between autonomous demand and output in the long run, the results show that capacity utilization still plays a key role in the short-run adjustment mechanism. Therefore, admitting that Keynesian results may hold even after the traverse, our work suggests to be Kaleckian in the short run and Sraffian in the long run. |
| Keywords: | Distribution, effective demand, Eurozone, growth, Neo-Kaleckian, Sraffian, Supermultiplier |
| JEL: | B51 E11 E12 O41 O47 O52 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1904&r=all |
| By: | Stephen G. Hall; Heather D. Gibson; Pavlos Petroulas; George S. Tavlas |
| Abstract: | We examine the impact of Emergency Liquidity Assistance (ELA) on bank lending in eleven euro area countries. With the intensification of the financial crisis, ELA came to take on an almost systemic role in some countries (notably Greece), with either the whole or large parts of national banking systems depending on it. Despite this crucial role, assessments of the quantitative impact of ELA in the literature are non-existent. This paper aims to fill this gap. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on bank lending. Our model corrects a key mis-specification found in the prototype model used in the literature on bank lending. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks. Our results suggest that the provision of ELA generated positive spillovers to other banks. |
| Keywords: | Euro area financial crisis, Emergency Liquidity Assistance (ELA), European banks, spatial panel model |
| JEL: | E3 G01 G14 G21 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:19/01&r=all |
| By: | Ozili, Peterson K |
| Abstract: | The distinction between GSIBs (systemic banks) and non GSIBs (non-systemic banks) is driven by policy reasons. I examine the behaviour of non-performing loans in European systemic and non-systemic banks, and find that more profitable banks witness higher non-performing loans regardless of whether they are systemic or non-systemic. Systemic banks have fewer non-performing loans during economic booms and during periods of increased lending while non-systemic banks experience higher NPLs during periods of increased lending. I also observe that European non-systemic banks that exceed regulatory capital requirements have higher NPLs. In the post-2007 financial crisis period, the NPL of systemic banks is negatively associated with the economic cycle which imply that the NPL of systemic banks is procyclical with the state of the economy, and the NPL of systemic banks are positively associated with loan supply and bank profitability. On the other hand, the NPL of non-systemic banks is negatively associated with regulatory capital ratios, and is positively associated with bank profitability for non-systemic banks in the post-2007 financial crisis period. The findings have implications. |
| Keywords: | credit risk, nonperforming loans, systemic banks, systemic risk, impaired loans, asset quality; European banks, Europe, bank profitability. |
| JEL: | G01 G02 G18 G21 G23 G28 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94008&r=all |
| By: | Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe |
| Abstract: | We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices’ responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area. JEL Classification: E43, E44, E52, E58, G12, G14 |
| Keywords: | asymmetry, ECB policy surprise, event-study, intraday, persistence |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192281&r=all |
| By: | Pana Alves (Banco de España); Daniel Dejuán (Barcelona graduate School of economics); Laurent Maurin (European Investment Bank) |
| Abstract: | This study illustrates how information from micro-level and survey-based databases can be used, along with macroeconomic indicators, to provide a better understanding of corporate investment obstacles across the EU. To show this, we use a novel dataset merging firm-level data from the European Investment Bank Investment Survey (EIBIS) and hard data from corporations’ balance sheet and P&L information. We show that the indicators of impediments to investment at the country level, which can be derived from aggregating qualitative answers, correlate relatively well with macro-based hard data, which are commonly considered as determinants of investments in macro-based models. After controlling for firm-specific characteristics, the perceived investment gap (the difference between desired and actual investment) remains correlated with the reported impediments. While access to finance is not the most reported obstacle, reporting it has the highest information content. Moreover, the signal intensifies when it is given by “weaker” firms, defined as those that are smaller, and/or more indebted, and/or less profitable and/or with lower liquidity positions. From a policy standpoint, our findings suggest that survey-based information can be a useful input to complement both macro and micro hard data and better inform the design of targeted policies to support investment. |
| Keywords: | investment obstacles, investment gap, corporate investment, investment determinants, survey-based information, access to finance. |
| JEL: | D22 G30 G38 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1908&r=all |
| By: | Elien Meuleman; Rudi Vander Vennet (-) |
| Abstract: | This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency enables us to assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. However, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments. |
| Keywords: | European banks, macroprudential policy, systemic risk |
| JEL: | E58 G18 G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:19/971&r=all |
| By: | Valeria Cirillo; Matteo Sostero; Federico Tamagni |
| Abstract: | This article investigates the relation linking single-employer bargaining and within-firm wage dispersion -- a significant driver of overall wage inequality. The study considers six European economies (Belgium, Spain, Germany, France, the Czech Republic and the UK), featuring different collective bargaining institutions, in 2006 and 2010. We examine two different measures of within-firm inequality, allowing to capture how different groups of employees (top vs. bottom paid, and managers vs. low-layer employees) may differently benefit or lose from firm-level bargaining. Our findings show that firm-level bargaining has heterogeneous effects across countries, over time and by inequality measures. We interpret our evidence as supporting that country-specificities and the heterogeneous balance of power within organizations represent key elements to understand the role of the bargaining system in shaping inequalities. |
| Keywords: | within-firm wage inequalities, occupational wage-gap, firm-level bargaining, matched employer-employee data |
| Date: | 2019–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2019/12&r=all |
| By: | Mehmet Ziya Gorpe; Giovanni Covi; Christoffer Kok |
| Abstract: | This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We develop a Contagion Mapping model fully calibrated with bank-level data to study the contagion potential of an exogenous shock via credit and funding risks. We find that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics. |
| Date: | 2019–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/102&r=all |
| By: | Demiralp, Selva; Eisenschmidt, Jens; Vlassopoulos, Thomas |
| Abstract: | Negative monetary policy rates are associated with a particular friction because the remuneration of retail deposits tends to be floored at zero. We investigate whether this friction affects banks’ reactions when the policy rate is lowered to negative levels, compared to a standard rate cut in the euro area. We exploit the cross-sectional variation in banks’ funding structures jointly with that in their excess liquidity holdings. We find evidence that banks highly exposed to the policy tend to grant more loans. This confirms studies that point to higher risk taking by banks as a reaction to negative rates. It, however, contrasts some earlier research associating negative rates with a contraction in loans. We illustrate that the difference is likely driven by the broader coverage of our loan data, longer time span of our sample and, importantly, the explicit consideration of the role of excess liquidity in our analysis. JEL Classification: E43, E52, G11, G21 |
| Keywords: | bank balance sheets, monetary transmission mechanism, negative rates |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192283&r=all |
| By: | Jakub Rybacki |
| Abstract: | Fiscal forecasts produced by international financial institutions came under strong criticism after the Eurozone sovereign debt crisis due to overly optimistic estimates for heavily indebted countries like Spain, Italy, and Portugal. Presently, in the face of strong divisions within the European political landscape, international organizations have also been accused of applying a double standard. Opponents often claim those organizations depict a more negative picture for governments described as populist in the mainstream media. The aim of this paper is to evaluate fiscal forecasts provided by the International Monetary Fund (IMF), European Commission (EC), and the Organization for Economic Co-operation and Development (OECD). Our analysis is based on a panel of European Union economies, other OECD members, and large non-OECD economies (e.g., China). Five years after the Sovereign debt crisis, we still find negative phenomenon reported earlier in the literature. In Europe, all organizations systematically present overly optimistic deficit forecasts for Portugal, Spain, and, to a lower extent, for Italy. Moreover, the EC and OECD are being indulgent to countries under the excessive deficit procedure. There is also an evidence for strong autocorrelation of ex-post fiscal forecast errors. On the other hand, we find no strong evidence suggesting that fiscal forecasts stigmatize the governments accused of populism or violating the rule of law. Finally, in the case of European emerging economies, some kind of wishful thinking is present. For example, the EC overestimates governments’ propensity to tighten fiscal policy during the expansion period of a business cycle and forecasts an overly pessimistic picture during a slowdown. |
| Keywords: | deficit forecasts, excessive deficit procedure. |
| JEL: | H62 H68 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2019044&r=all |
| By: | Yin-Wong Cheung (City University of Hong Kong); Sven Steinkamp (Osnabrück University); Frank Westermann (Osnabrück University) |
| Abstract: | We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8 Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, common economic factors, and country-specific factors. Furthermore, we highlight the global financial crisis effects and, for Germany, the importance of differentiating balances against euro and non-euro countries. |
| Keywords: | Currency Misalignment; Current Account Surplus; Global Imbalances; Global Financial Crisis |
| JEL: | F15 F31 F32 |
| Date: | 2019–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0114&r=all |
| By: | Georges Prat; David Le Bris |
| Abstract: | We consider a representative investor whose wealth is shared between a replica of the equity market portfolio and the riskless asset, and who maximizes the expected utility of their future wealth. For a given time-horizon, the solution of this program equalizes the required risk premium to the product of price of risk by the expected variance of stock returns. As a tentative to capture exogenous disturbing effects, the term spread of interest rates and US equity risk premia complement this relationship. Two traditional horizons are considered: the one-period-ahead horizon characterizing the ‘short-term’ investor and the infinite-time horizon characterizing the ‘long-term’ investor. For each horizon, expected returns are represented by mixing the three traditional adaptive, extrapolative and regressive process, expected variance is represented by a GARCH process, while the unobservable time-varying price of risk is estimated according to the Kalman filter methodology. Based on annual French data established by Le Bris and Hautcoeur (2010), large disparities in the dynamics of the short- and long term observed premia are evidenced from 1872 to 2018, while, due to risky arbitrage and transaction costs, the observed premia appeared to gradually converge towards their required values. Overall, although the French market had experienced very strong historical shocks, our model provides both measurements and explanations of French short- and long-term risk premia and so shed some additional light on the existence of a time-varying term structure of equity risk premia. Despite differences, results on the French market are rather in accordance with those by Prat (2013) based on US secular data. |
| Keywords: | equity risk premium, time horizon, France |
| JEL: | D81 D84 E44 G11 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-8&r=all |