Ben-Haim, Yakov; Demertzis, Maria; Van Den End, Jan Willem
This paper applies the info-gap approach to the unconventional
monetary policy of the Eurosystem and so takes into account the
fundamental uncertainty on inflation shocks and the transmission
mechanism. The outcomes show that a more demanding monetary
strategy, in terms of lower tolerance for output and inflation gaps,
entails less robustness against uncertainty, particularly if financial
variables are taken into account. Augmenting the Taylor rule with a
financial variable leads to a smaller loss of robustness than taking into
account the effect of financial imbalances on the economy. However,
in some situations, the augmented model is more robust than the
baseline model. A conclusion from our framework is that including
Darvas, Zsolt; Schoenmaker, Dirk
Integrated capital markets facilitate risk sharing across countries. Lower
home bias in financial investments is an indicator of risk sharing.
We highlight that existing indicators of equity home bias in the
literature suffer from incomplete coverage because they consider only
listed equities. We also consider unlisted equites and show that equity
home bias is much higher than previous studies perceived. We also
analyse home bias in debt securities holdings, and euro-area bias.
We conclude that European Union membership may foster financial
integration and reduce information barriers, which sometimes limit
We calculate home bias indicators for the aggregate of the euro area as
if the euro area was a single...
The challenges facing Europe today cannot be addressed without putting into practice one of the main objectives pursued by member states when concluding the Treaty of Lisbon, argues the author of this paper; that objective being that the Union should be capable of acting as a strong and united player on the international scene, rather than as a more or less effective coordination platform for 28 international policies. Brexit and the new administration in Washington only reinforce this finding. To ensure that the Union can play this role, member states must, however, accept that the Union effectively exercises the competences...
Wood, Donna E.
In many federal political systems, responsibility for unemployment has a multi-tiered architecture,
with competence for key elements − including unemployment insurance, social assistance, and the
public employment service − dispersed across different orders of government. This paper tells the
story of the long transformation of unemployment insurance into a federal responsibility in Canada,
and seeks to identify lessons from Canada’s experience that might be useful as Europeans consider
the potential of an EU-wide unemployment benefits scheme in response to the financial and euro
crisis that started in 2008. Most European scholars look to the United States for transferable ideas. I
argue that Canada is a more salient...
Chan, Stephanie; van Wijnbergen, Sweder
Contingent convertible capital (CoCo) is a debt instrument that converts to equity or is written off if
the issuing bank fails to meet a distress threshold. The conversion increases the issuer’s lossabsorption
capacity, but results in wealth transfers between CoCo holders and shareholders, which in
turn gives rise to risk-shifting incentives to shareholders. Using the framework of call options, we find
that the risk-shifting incentives arising from issuing CoCos relative to subordinated debt have two
opposite effects: higher risk increases the probability of CoCo conversion, while lowering the benefit
of the wealth transfer relative to the same amount of subordinated debt. For writedown CoCos, the
Economic resilience is essential to better withstand adverse shocks and reduce the
economic costs associated with them. We propose different measures of resilience and
empirically gauge how countries differ in their shock absorption capacity, while
controlling for the quality of their economic structures. The paperfindsrobust evidence
that sound labour and product markets, framework conditions and political institutions
increase resilience to adverse shocks and reduce the incidence of crisis more generally.
In the presence of a common shock, a country with weaker economic structures can,
on average, suffer up to twice the output loss in a given year compared to a country
with sound institutional parameters. Similarly, the likelihood...
Proposals for different types of elements of a fiscal union have flourished in recent years, both from
academic and policy circles. Since a fiscal union could take a constellation of different forms, this
paper first provides an analytical framework pinpointing the five key elements of a fiscal union. It
takes stock of the existing features of EMU that embed some form of fiscal union, and then critically
analyses the main arguments for and against further fiscal integration. Finally, it surveys the key
proposals for a fiscal capacity and different types of Eurobonds.
Belke, Ansgar; Osowski, Thomas
This paper identifies and measures fiscal spillovers in the EU countries empirically using a
global vector autoregression (GVAR) model. Our aim is to look at the sign and the absolute
values of fiscal spillovers in a country-wise perspective and at the time profile (impulse
response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy
shocks originating in Germany and France. However, there is significant variation regarding
magnitude of the spillovers among destination countries and country clusters. Furthermore,
we find some evidence that spillovers generated by German or French fiscal spillovers are
stronger for EMU than non-EMU countries in Europe.
JEL codes: C50, E61,...
Darvas, Zsolt; Schoenmaker, Dirk; Véron, Nicolas
European Union countries offer a unique experience of financial regulatory and supervisory integration, complementing various other European integration efforts following the second world war.
Financial regulatory and supervisory integration was a very slow process before 2008, despite significant cross-border integration especially of wholesale financial markets.However, the policy framework proved inadequate in the context of the major financial crisis in the EU starting in 2007, and especially in the euro area after 2010.
That crisis triggered major changes to European financial regulation and to the financial supervisory architecture, most prominently with the creation of three new European supervisory authorities in 2011 and the...
Belke, Ansgar; Domnick, Clemens; Gros, Daniel.
This paper examines business cycle synchronization in the European Monetary Union with a special focus on the core-periphery pattern in the aftermath of the crisis. Using a quarterly index for business cycle synchronization by Cerqueira (2013), our panel data estimates suggest that it is countries belonging to the core that are faced with increased synchronization among themselves after 2007Q4, whereas peripheral countries decreased synchronization with regards to the core, non-EMU countries and among themselves. Correlation coefficients and nonparametric local polynomial regressions corroborate these findings. The usual focus on co-movements and correlations might be misleading, however, since we also find large...
In this Working Paper, Zsolt Darvas estimates the global and regional distribution of income and calculates statistics of global and regional income inequality.
Petropoulos, Georgios; Willemsz, Bert
Coordinating the timing and location of new production facilities is
one of the challenges of liberalized power sectors. It is complicated by
the presence of transmission bottlenecks, oligopolistic competition,
and the unknown prospects of low-carbon technologies. We build
a model encompassing a late and early investment stage, a clean
(green) and dirty (brown) technologies, and a single transmission
bottleneck and compare dynamic efficiency of several market designs.
Allocating network access on a short-term competitive basis distorts
investment decisions as brown firms will pre-empt green competitors
by investing early. Compensating early investors for future network
congestion, as for instance in the E.U., only exacerbates this problem.
Dynamic efficiency is restored with long-term...
This paper shows that economic convergence continued during the crisis for the EU as a whole, although at a slower pace, but for regions in the EU14, and especially in the euro area, convergence appears to have stopped during the crisis, or even switched to a divergence path.
The importance of monetary policy for the current ultra-low interest rates is often over-estimated. As emphasised by ECB President Draghi himself, monetary policy cannot determine long-term rates directly, and its influence on long-term real rates is even more limited and indirect.
Moreover, long-term bond yields have fallen to unprecedented low levels throughout developed countries. The influence of any single central bank on bond yields in its currency area must be quite limited if global capital markets are integrated.
The importance of the ECB’s policy in driving down rates in the euro area is widely assumed to be substantial. But even the ECB...
The Transatlantic Trade and Investment Partnership (TTIP) is a comprehensive preferential
trade agreement that is expected to have a significant effect in EU and US bilateral trade and
investment relations. As the negotiations are ongoing, this paper uses a scenario analysis to
estimate the potential effects of TTIP under likely negotiated outcomes. In our main scenario,
we assume a final trade deal where current tariffs are eliminated and non-tariff barriers are
significantly reduced. Using a CGE model (WorldScan), we simulate the potential economic
effects for the Netherlands and the EU. We find that US-Dutch bilateral trade doubles and this
is translated into a positive but moderate effect...
Garcia Herroro, Alicia; Xu, Jianwei
The Belt and Road initiative, recently embarked on by China, aims to improve cross-border infrastructure in order to reduce transportation costs across a massive geographical area between China and Europe. We estimate how much trade might be created among Belt and Road countries as a consequence of the reduction in transportation costs (both railway and maritime) and find that European Union countries, especially landlocked countries, should benefit considerably. This is also true for eastern Europe and Central Asia and, to a lesser extent, south-east Asia. In contrast, if China were to seek to establish a free trade area within the...
Belke, Ansgar; Gros, Daniel.
Adjustment to an external imbalance is more difficult within a monetary union if wages are
sticky. Periods of high unemployment are usually necessary to achieve the required real
depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute
the output and employment cost over time. This paper takes into account that gradual
adjustment also has a cost in terms of higher current account deficits and thus a higher debt,
and ultimately higher debt-service costs. We calculate the optimal path/speed of price and
wage adjustment in terms of deeper parameters like the slope of the Phillips curve, the degree
of openness, etc. Gradual adjustment is not always optimal.
García-Herrero, Alicia; Xu, Jianwei
This paper analyses empirically how increasingly close trade relations
between China and Russia might affect the European Union (EU).
We show that EU countries are complementary to Russia on the
Chinese market. However, Chinese exports are increasingly relevant
substitutes for EU exports on the Russian market. This means that
an increase in China-Russia economic cooperation should have a
negative impact on European exports. We simulate a scenario in
which trade tariffs between Russia and China are eliminated, which
is found to reduce EU exports to Russia. Finally, a more granular
approach to the question analyses which sectors in Europe will be
more affected by the increasing economic links between China
Kostanyan, Hrant.; Meister, Stefan
Although the Minsk process brought about a de-escalation of the conflict in Eastern
Ukraine, not all of its 13 points have been implemented, including a ceasefire and
withdrawal of heavy weaponry. In the absence of a military option, economic sanctions
have become the core instrument of the EU and the US, to respond to Russia’s
aggression. At the end of June 2016, when EU Heads of State and Government meet to
discuss the extension of sanctions against Russia, they should bear in mind that Russia
did not implement the commitments it took upon itself in the framework of the Minsk
agreements. Given the persistent deadlock in the...
Petropoulos, Georgios; Marcus, J. Scott
On 25 November 2015, the European Union enacted new rules for international mobile roaming (IMR) under Regulation 2015/2120, which seeks to implement a Roam Like at Home (RLAH) regime among the member states of the European Union. Questions remain, however, as to whether it is possible to implement RLAH without mandating below-cost pricing and thus introducing significant regulatory and economic distortions.