European Economic And Monetary Union Countries Research Articles

Making the Eurozone work: a risk-sharing reform of the European Stability Mechanism

This work presents an original proposal for the reform of the Eurozone architecture according to an approach based on risk sharing (aiming to reach in the long-term the mutualization of public debt). The proposal envisages a new role for the European Stability Mechanism (ESM) which should gradually become the guarantor of the public debts of the European Economic and Monetary Union (EMU). In this way, the new ESM would support the full transition from national debts to a single Eurozone public debt (e.g. Eurobonds) with a single yield curve for all countries. Our proposal would benefit both core and peripheral EMU countries. Indeed, the riskiest countries, which would gain from the ESM conditional debt guarantee, should give up the possibility of redenominating their national debt and would pay to the ESM the corresponding market price of the guarantee. This would strengthen the capital endowment of the ESM and also allow it to use its leverage capability to support the realignment of the economic cycles of the different countries through profitable public investment plans concentrated in the weakest regions of the EMU. Such plans would be coordinated and implemented by the European Union. After a transition period, our Insurance Fund proposal would contribute to a much more resilient monetary union, with a European fiscal policy and mutualized debt. Admittedly this proposal presupposes a political consensus at the EU level to reinterpret the no bailout rule enshrined in the treaties so that risk sharing institutions implemented with fairly priced insurance scheme can be allowed. New risk sharing institutions will foster a common vision of belonging to the same federal, political union in the making, the only one compatible with the abdication of fiscal sovereignty by national governments.

New empirical evidence on the impact of public debt on economic growth in EMU countries

New empirical evidence is presented on the impact of public debt on economic growth. To that end, we employ the Autoregressive Distributed Lag (ARDL) bounds testing approach using annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1961-2015 period. In particular, we allow for different endogenously (data- based) regimes in the parameter relating the public debt variable to the real growth rate. Our results suggest that the impact of public debt on economic growth not only changes across EMU countries, but also over time.

Debt-Growth Linkages in EMU Across Countries and Time Horizons

This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country.

Time Varying Integration in EMUUs Retail Banking to Non-Financial Corporations

This paper investigates the process of integration within the European Economic and Monetary Union (EMU) retail banking by analysing deposit and lending rates to non-financial corporations during the normal and crisis periods over 2003-2014. The paper assesses the impact of the Global Financial Crisis (GFC) as well as the European Debt Crisis (EDC) on the integration process. Secondly, it also investigates the relationship between economic growth and the degree of integration by comparing integration across three groups of sample EMU countries, classified based on their GDP. An important contribution of the paper is that instead of relying on one measure, it employs five indicators to assess multiple dimensions of integration process, that are, beta convergence, sigma convergence, variance ratio, asymmetric DCC and dynamic cointegration. The empirical results point towards weak degree of integration in retail banking sector, and the twin crises have worsened the progress. In addition, the credit market, is observed to be more heterogeneous than the deposits market. Furthermore, the small term maturity products are more converged than longer maturity products.

Bank risk behavior and connectedness in EMU countries

Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyzes the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists, but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12–18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.

Forward Looking Banking Stress in EMU Countries

Based on contingent claims analysis (CCA), this paper tries to estimate the systemic risk build-up in the European Economic and Monetary Union (EMU) countries using a market based measure "distance-to-default" (DtD). It analyzes the individual and aggregated series for a comprehensive set of banks in each eurozone country over the period 2004-Q4 to 2013-Q2. Given the structural differences in financial sector and banking regulations at national level, the indices provide a useful indicator for monitoring country specific banking vulnerability and stress. We find that average DtD indicators are intuitive, forward-looking and timely risk indicators. The underlying trend, fluctuations and correlations among indices help us analyze the interdependence while cross-sectional differences in DtD prior to crisis suggest banking sector fragility in peripheral EMU countries.

Causality and Contagion in EMU Sovereign Debt Markets

This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behavior. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases provide clear evidence of contagion in the aftermath of the current euro debt crisis.

Causality and contagion in EMU sovereign debt markets

This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behavior. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases provide clear evidence of contagion in the aftermath of the current euro debt crisis.

Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model

The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations’ model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge.

Granger-causality in peripheral EMU public debt markets: A dynamic approach

Our research aims to analyze the possible existence of Granger-causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise Granger-causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of significant increase in Granger-causality between yields on bonds issued by different countries. In the second step, we study the determinants of these episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.

Crisis de la deuda soberana y apalancamiento en la zona euro: un intento de cuantificación

From the perspective provided by more than three years from the start of the euro area sovereign debt crisis, it can be observed that its origin goes beyond fiscal imbalances in the euro countries. The interconnection between private and public debt is obvious. Moreover, the transmission of the crisis through the banking system is obvious, given the high banking integration between European Economic and Monetary Union (EMU) countries. These facts have led to the analysis carried out in this paper, and presents an attempt to quantify the level of global indebtedness (public and private) of all eurozone countries, using a database that has been built up with the statistics provided by the European Central Bank, and on foreign banks’ claims on the debt of EMU countries, using data supplied by the Bank for International Settlements.

Volatility in EMU sovereign bond yields: permanent and transitory components

This article explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour of daily yields for 11 EMU countries (EMU-11), during the period 2001–2010. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee's (1999) Component-Generalized Autoregressive Conditional Heteroscedasticity (C-GARCH) model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closely linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further supports our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.

Causality and Contagion in Peripheral EMU Public Debt Markets: A Dynamic Approach

Our research aims to analyze the causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of contagion between yields on bonds issued by different countries. In the second step, we study the determinants of these contagion episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.

Volatility in EMU Sovereign Bond Yields: Permanent and Transitory Components

This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries (EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee (1999)'s component-GARCH model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further supports our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.

Difficulties of One-Dimensional Fiscal Policy in the EMU

Membership in the European Economic and Monetary Union (EMU) causes an individual country to lose the possibility to using monetary policy for the stabilization of country-specific shocks, thus leaving fiscal policy as its only remaining instrument. However, fiscal policy is restricted because the member countries receive instructions from the European Commission to coordinate their fiscal policies. In 1993, the Maastricht treaty sets four convergence criteria that must be met by each member country before it can take part in the third stage of the EMU: that is, before it can adopt the common currency, the “EURO.” The convergence criteria are meant to ensure that economic development within the EMU is balanced and does not give rise to any tensions among member countries. One of the convergence criteria was the restrictions on fiscal policy. In our study we focus on the individual national outcome of fiscal policy instructions given to all member countries of the EMU. We show that fiscal policy restrictions affect developing and developed countries differently. We employ a growth model with optimal fiscal policy and the Convergence Hypothesis, to define reasons for the balance between public and private capital in a developed country as well as the different effects of one-dimensional fiscal policy restrictions on developing and developed countries. Then we empirically analyze conditions of public and private capital and their effects on GDP in EMU member countries. Our findings suggest that one-dimensional fiscal policy coordination prevents smooth development of economic growth in the bottom four EMU countries, defined in terms of GDP per capita. We conclude that the bottom four countries have not reached the economic level of the top eight countries; therefore, identical fiscal policy instructions for the entire EMU will lead to disturbances of the capital conditions and economic growth in the bottom four countries.

Risk Sharing and Portfolio Allocation in EMU

This paper investigates whether risk sharing, measured as income and consumption smoothing, among countries in the EU and the European Economic and Monetary Union (EMU) has increased since the adoption of the euro. We ask: Have the recent increase in foreign equity and debt holdings been associated with more risk sharing? Do certain classes of assets (debt, equity, foreign direct investment) provide relatively more or less risk sharing? Do liabilities provide risk sharing differently from assets? Do investments in EMU countries provide more or less risk sharing per euro invested compared to investments in non-EMU countries? Has increased banking integration improved risk sharing? Due to the short span of years since the introduction of the euro, our results are tentative, but they indicate that the monetary union has facilitated risk sharing, although the level of risk sharing is still much below the level found among U.S. states.

Reserve Requirement Systems in OECD Countries

This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systems’ demand for liquidity. These include twelve OECD countries that are also members of the European Economic and Monetary Union (EMU) and twelve non-EMU OECD countries. All EMU countries employ a single reserve requirement system, which is treated as one entity. ; The reserve requirement system for each of the twelve non-EMU countries is discussed separately. The similarities and differences among the thirteen reserve requirement systems are highlighted. The features of reserve requirements covered include: reservable liabilities, required reserve ratios, reserve computation periods, reserve maintenance periods, types of reserve requirements, calculations of required reserves, eligible assets for satisfying reserve requirements, remuneration on reserve balances, non-compliance penalties, carry-over of reserve balances, and required clearing balances.

Business cycle affiliations in the context of European integration

We study affiliations for the countries of the European Economic and Monetary Union (EMU) with Germany and the USA, using various business cycle measures derived from quarterly real GDP. These measures are Hodrick-Prescott and Baxter-King filtered series and annual growth rates. By using rolling contemporaneous and maximum (over a short lead/lag interval) correlations, we document increasing correlations of EMU countries with Germany, with these typically being largest during the 1990s. We also document a strong leading role for the USA in relation to these countries in the period since 1993, thereby correcting the fallacy that the European business cycle was disjointed from the USA for most of the 1990s.

Reserve Requirement Systems in OECD Countries

This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systemsâ demand for liquidity. These include twelve OECD countries that are also members of the European Economic and Monetary Union (EMU) and twelve non-EMU OECD countries. All EMU countries employ a single reserve requirement system, which is treated as one entity.The reserve requirement system for each of the twelve non-EMU countries is discussed separately. The similarities and differences among the thirteen reserve requirement systems are highlighted. The features of reserve requirements covered include: reservable liabilities, required reserve ratios, reserve computation periods, reserve maintenance periods, types of reserve requirements, calculations of required reserves, eligible assets for satisfying reserve requirements, remuneration on reserve balances, non-compliance penalties, carry-over of reserve balances, and required clearing balances.

Effects of Economic Convergence on Stock Market Returns in Major EMU Member Countries

This study updates and extends existing literature by investigating the effects of economic convergence among major European Economic and Monetary Union (EMU) member countries on stock market returns in each respective nation. Main findings include: (1) long-term stability in the EMU appears to be attainable, but further integration of product and factor markets is needed to reinforce convergence of real sectors; (2) the UK can be considered a quasi EMU participant due to convergence of its key economic variables with those of formal EMU members; and (3) economic convergence appears to be an important contributing factor to returns from stock markets in the included EMU countries except Germany.