Periphery Economies Research Articles

Resilient forces: The role of intangible capital in mitigating financial contagion dynamics

This essay explores the mechanics of financial shocks within a globalized framework, employing a two-country macroeconomic model to distinguish between core and periphery economies. Our research indicates that intangible assets, serving as stable collateral, respond more robustly to economic shocks than traditional physical forms. Moreover, the study highlights the complex transmission mechanisms of productivity and leverage shocks, revealing that while the financial sector effectively assimilates the positive economic outcomes resulting from a productivity shock, leverage shocks, despite depleting capital, paradoxically stimulate overall economic output.

Estimating uncertainty spillover effects across euro area using a regime dependent VAR model

Abstract This paper investigates macroeconomic uncertainty spillover effects across countries and their impact on real economic activity in different economic periods, i.e. pre-crisis and during the recent financial crisis. The analysis is initially carried out using Monte Carlo simulations and, subsequently, real data for four euro zone economies, namely Italy, France, Germany, and Spain. The Monte Carlo findings clearly indicate a need to account for spillover effects across countries when investigating the impact of aggregate uncertainty on economic variables. The empirical results provide clear-cut evidence of the existence of macroeconomic spillovers between the four euro countries, with some feedback from periphery economies, notably Italy, to the core economies during the financial crisis period. Further, the impact of uncertainty on real economic activity is dampened for the four euro countries when spillover effects are accounted for. Spillover effects among the four countries are also observed when US uncertainty is taken into account. Further, US macroeconomic uncertainty impacts negatively on the real economic activity of the four euro countries.

Lost in consolidation? Declining public investment, multiplier effects and alternatives to the path of fiscal consolidation in Portugal

This paper deals with one of the most pressing concerns that Eurozone periphery economies will face in the near future: how to achieve a sustained recovery from the COVID-19 crisis while dealing with growing public debt-to-GDP ratios. The paper assesses the macroeconomic relationship between public spending, economic growth and debt sustainability. We use a TSLS method to perform the econometric estimation of the public spending multiplier for a panel of 11 Eurozone economies over the 1995–2019 period. We find evidence that the multiplier is positive and close to 1,8, suggesting that the benefits of promoting public investment exceed its initial financing cost. As a result, we conclude that debt sustainability is not only compatible with, but in fact improved by a more expansive fiscal policy and present an alternative policy path for the Portuguese economy in the 2021–2025 period based on this conclusion.

The Decline of EMU Core Countries’ Portfolio Equity Investments in the Euro Area: The Role of Stock Return Correlations

This paper investigates the effect of time-varying stock market correlations on the abrupt and persistent decrease of the reciprocal foreign investments by Euro area member countries after 2007. A strong stock market correlation reduces the diversification opportunities and it may therefore have affected the reciprocal investment by EMU countries. The 2007 represents both the outbreak of the global financial crisis and the beginning of the enlargement process. The two events have had a very different impact on the stock returns’ correlation among EMU members. While the enlargement to new countries has reduced the average returns’ correlation within the Euro area as a whole, the financial crisis and the sovereign debt crisis have led to an increase in stock returns’ correlation among old member states. We find that, among old EMU countries, core countries have been particularly affected by stock returns’ correlation. They reduced their equity investments both in foreign EMU core and in foreign EMU periphery economies after the crisis, with a particularly pronounced contraction witnessed by those country-pairs that displayed highly correlated asset returns. These results highlight the importance of the diversification motive for international portfolio investments and complement the institution-based explanation of the decline of the Euro area investments.

Veza između javnih prihoda i javne potrošnje - dokazi o heterogenosti Evrozone

After the global economic crisis, a broad consensus has emerged that membership in the Eurozone exerts a strong pressure on fiscal policy, since it is characterized by the dichotomy of common monetary policy and heterogeneous fiscal policies. This paper analyzes the performance of fiscal policies, highlighting the nexus between the public revenues and public expenditure from the angle of 19 Eurozone economies in the period 2010q1-2020q4. The research is based on Dumitrescu & Hurlin (2012) and Juodis, Karavias & Sarafidis (2021) Granger non-causality tests in macro panels in order to test causality direction, as well as Westerlund errorcorrection-based panel cointegration test to analyze fiscal sustainability. Having in mind the heterogeneity and divergency of the Eurozone members, sub-samples were estimated, concerning the core, the periphery and the emerging Eurozone economies. The results imply that all Eurozone economies achieve weak fiscal sustainability, while all economies from the group of Eurozone periphery applied "tax and spend" hypothesis. The empirical finding could be related to the fact that Eurozone periphery economies were hit harder by the global and sovereign debt crisis, and that implemented austerity and bail-out programs were adequate, thus resulting in sustainable fiscal position, reducing heterogeneity of fiscal performance within the Eurozone economies.

PIGS ECONOMIES: BAIL-OUT VS. BAIL-IN

This paper analyzes bail-out and bail-in programs in the Eurozone periphery economies after the transformation of the global crisis into a debt crisis. Continuous rise of debt service costs was leading PIGS economies (Portugal, Ireland, Greece, Spain) either to abandon of Eurozone or to negotiate rescue programs. Using Panel corrected standard errors (PCSE) method, the research shows that bail-out programs had a negative effect on GDP growth in PIGS economies in the period 2011-2019, as the consequence of crowding-out effects. However, the results showed that bail-out programs could positively affect fiscal variables. An alternative solution is the bail-in mechanism, which is a sustainable mechanism that does not burden taxpayers. Based on examples of banks in Spain and Portugal, results show that using bail-in programs, panic and contagion effects could be avoided; however, in the case of future crisis, the effects of bail-in programs on the real economy still need to be examined.

2008 Financial Crisis: A Comparative Analysis of Turkey and Brazil in Terms of Economic Policies

The Financial Crisis, which broke out in the US due to the mortgage bubble, had spread through financial channels to core countries. The periphery countries that weren’t fully integrated into the financial markets had been influenced via economic ways, indirectly. However the crisis -spreading on a global scale- had had negative impacts on all countries and had led to changes in the economic policies of states. One of the possibilities of the crisis was for it to turn into a cyclical crisis because of its reach throughout the whole world and the failure of economic policies -applied to one after another- in the preventing of the spread and impact of the crisis in a short time, resulting in economic and neoliberal policies being questioned. The periphery economies, being economically affected by the crisis, had to assume many economic costs due to mortgage loans in the US, which had nothing to do with them. In the study, through the examples of Brazil and Turkey within the framework of these discussions, the implication of economic policy has been examined for periphery countries. In the study, the way in which both countries were affected by the crisis has been evaluated through net capital flows, foreign direct investments, foreign trade data, and main economic indicators. Although neoliberal policies, which pushed both countries towards this process, had added them to the global economic system, they had to apply Keynesian policies because neoliberalism had become inadequate in exiting the crisis. In the conclusion of the study, policy proposals have been made for getting out of the crisis by discussing the ineffectiveness of the economic policies that had been implemented.

A comparative assessment of the spillovers of US monetary policy shocks and its mitigation

We conduct a comparative assessment of the spillovers of three types of Fed’s monetary policy surprises, i.e., Fed funds rate (FFR), Forward guidance (FG), and Large-scale asset purchases (LSAP) on monetary autonomy in the periphery economies (PEs). We find these shocks to be significant in causing loss of monetary autonomy in the PEs. We also find that the macroprudential tools mitigate the degree of such impairment. This holds for two types of macroprudential policies, i.e., borrower-targeted and financial institutions-targeted. We find both of them to be most effective against the FFR shocks. Comparing the macroprudential tools, we find the financial institutions-targeted tools to be more effective than the borrower-targeted ones in mitigating the degree of impairment against all types of Fed shocks.

Variations and differences in the application of HR policies and practices by US hotel multinational firm’s subsidiaries across coordinated and transitional periphery economies: a case approach

In this study, we explore how, and to what extent, home country effects on HR practice in hotel industry MNEs might diminish when host country institutional mediation is weak or uneven. This study centres on the case of luxury hotel chain subsidiaries of a US multinational firm operating across advanced coordinated and transitional periphery economies. It focuses on employee resourcing, training, reward and performance management practices, and draws on in-depth interviews, participant observation and document analysis thereby enabling triangulation of results. Through qualitative analysis, we conclude that the reduction in home country effects in subsidiaries operating in uncertain environments of transitional periphery economies reflects not only the extent to which prominent foreign players may be subject to closer regulatory scrutiny even when enforcement capabilities are weak but also the operation of extended clan-based networks of support.

Institutional quality in the Euro area countries: any evidence of convergence?

ABSTRACT Divergence in institutional quality across Euro area countries constitutes a risk for the smooth functioning of the Economic and Monetary Union (EMU), increasing the vulnerability of the Euro to negative economic shocks. In this paper, we examine potential institutional convergence across Euro area countries since the onset of the Great Recession (2008–2017). We focus on a range of institutional aspects closely connected with business performance, both in the public and private sphere. While no significant pattern in the evolution of institutional quality in relation to the initial level (β-convergence) is observed, there is increasing dispersion (σ-divergence) over the crisis period (2008–2014) and non-significant (β- nor σ-) convergence over the subsequent recovery period (2014–2017). Furthermore, an increasing gap in institutional quality between the core and the periphery countries is revealed, even more pronounced over the recovery period. The findings highlight that EU wide agreements to enhance institutional quality in periphery economies are highly advisable in order to increase the stability of the Euro.

On the term structure of liquidity in the European sovereign bond market

The paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, one of Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.

The Shrinkage After the Enlargement? The Effects of Crises and New Members’ Inclusion on Financial Integration in the Euro Area

The bilateral foreign portfolio equities among Euro area members have shrunk by 40 percent after 2007. While both the financial crisis and the enlargement are potentially responsible of this abrupt and persistent contraction in financial integration, our work detects a major role for the crisis. The deterioration of the control of corruption mechanisms in Euro periphery economies during the crisis is recognized as a potential driver of this shrinkage.

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

AbstractUsing a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.

On the Term Structure of Liquidity in the European Sovereign Bond Market

The paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, one of Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.

The impact of EMU on bond yield convergence: Evidence from a time-varying dynamic factor model

This paper examines the dynamics of long term sovereign bond yields for 21 OECD countries. Following Del Negro and Otrok (2008), we estimate a dynamic factor model, with time varying parameters and stochastic volatility, that decomposes the observed variation in bond yields for each country into a common factor, a regional factor (EMU/non-EMU), and an idiosyncratic country specific factor. We find that prior to the financial crisis of 2008, the common factor played a dominant role for most countries in our sample. In the post financial crisis period there is substantial heterogeneity in the relative importance of the EMU and the idiosyncratic factors across different countries. For instance, our results suggest that there was a decoupling between the EMU and bond markets of the periphery economies of Greece, Ireland and Portugal in the post-2008 period. We find that after the onset of sovereign debt crises in these economies, the idiosyncratic factor assumed an important role in driving the bond yield variation. Thereafter, the EMU’s share in bond yield changes in Ireland and Portugal increased considerably since 2012, whereas for Greece the idiosyncratic factor continued to play a significant role in driving bond yields. In contrast, the EMU factor consistently played a dominant role in explaining bond yield changes in Italy and Spain, the other two economies that also experienced severe debt crisis during this period. We argue such differences in the importance of the EMU factor between core and periphery economies can be attributed to the systemic importance of core members for the EMU. This is indicated by our finding that bond yields and credit default swap (CDS) are less sensitive to changes in debt-GDP ratios in countries where the EMU factor played a larger role in the post-2008 period.

Export Promotion Aims and Reality: A Comparison of the Iberian, Baltic and Central European Region

Abstract As a consequence of the international crisis in 2008-2009, the role of exports in economic growth came into focus in most countries. Exports of EU Member States gained momentum from 2010 onward but with certain changes in their structure and direction. In several countries, the turn towards non-EU areas, such as China or Latin America was part of the state export strategy. On the one hand, our article describes these foreign trade strategies and their institutional framework of the Iberian, Baltic and Central European governments, detecting possible similarities. On the other hand, we analyse recent export data. This way we can get a picture on the structure and direction of exports of periphery economies and this can be compared to the aims of the given states. Our hypothesis is that there is a gap between the reality and the intentions of the governments. The size of this gap varies and is influenced by certain factors such as the different involvement of multinational companies in foreign trade or the different economic structure of these countries. In our paper we list which countries adopted a government strategy and with what aim. We provide a short literature review on state trade promotion policies and discuss these policies and their institutions in the Baltic, Visegrád and Iberian countries.

Current account imbalances: A new approach to assess external debt sustainability

The aim of this paper is to analyze the external debt of three Euro area economies, Italy, Spain, and Germany. To study the effect of debt on the investment-consumption dynamics in those countries, we first discuss the causes, sources, and adjustment processes of current account deficits in industrialized economies, with a particular focus on the Eurozone member states. We then introduce new empirical measures of sustainability. Instead of using the common measure of external debt over GDP, we use debt over assets. To study the dynamics of external debt sustainability we use an intertemporal model of finite time horizon, which we numerically solve through Non-linear Model Predictive Control (NMPC) method. Using our numerical solution method, we provide a calibration of the external debt sustainability for Italy, Spain, and Germany. In the calibration of our model for those countries we also measure sustainability by the debt to asset ratio and show that the periphery economies moved toward a slow moving debt crisis, whereas Germany moved into a stable environment. Yet, the latter is likely to be affected by the former in the long run.

Testing the dependency theory on small island economies: The case of Cyprus

This paper empirically tests the validity of dependency theory in the small island setting of Cyprus, to establish whether a periphery/patron relationship exists between each of the island's two economies and their respective mainland partners of Greece and Turkey. Using data for the 1978–2013 period, we first test for the necessary condition, i.e. whether there is a long-run cointegrating relationship in the economic development of the Republic of Cyprus (RC) and Greece, and the Turkish Republic of Northern Cyprus (TRNC) and Turkey. We then test for the sufficient condition, i.e. whether periphery-economy per capita income series to be weakly endogenous, while those of patron economies are weakly exogenous. Our results indicate strong dependency within the periphery/patron economy pairs of the RC/Greece and the TRNC/Turkey. Further, we show that economic growth in the periphery economies is largely driven by that of the patron economies. Using a Markov-switching vector autoregressive (MS-VAR) model of the short-run business cycle, we demonstrate that the RC/Greece and the TRNC/Turkey co-move in the short-run, and that business cycles with each pair are synchronized. The policy implications of these findings are then discussed.

Core-Periphery Business Cycle Synchronization in Europe and the Great Recession

This article investigates the dynamics of business cycle synchronization in Europe. The European core business cycle is estimated by means of a cyclical trend decomposition model, and a testing procedure is proposed to study the stability of the interdependencies between the GDP growth rates of the economies and the cyclical common factor. Results show an extended European business cycle moving toward the synchronization levels enjoyed by core countries. In a second group of periphery economies (mainly economies of the EU enlargements of the 2000s) synchronization has increased since the beginning of the Great Recession.

Enduring capital flow constraints and the 2007–2008 financial and euro zone crises

This article analyses the 2007–2008 financial and the euro zone crises through the lens of an international capital flows crisis for European banks and the euro zone periphery. The notion of a specific Anglo-American weakness created by extreme financialisation and then made manifest in the financial crisis cannot explain why the experience of large commercial and universal French, German and UK banks during the two crises was much more similar to each other than the similarity between that of UK banks and US banks. Internationalised balance sheets, and in particular a dollar funding dependency, left these French, German and UK banks extremely vulnerable to crisis. French and German banks faced the same dollar funding crises at different junctures during the financial and euro zone crises, and from May 2010 to December 2012, these crises track the development of the euro zone crisis as experienced in the periphery. This dollar dependency ultimately made the survival of these banks dependent on financial support from the Federal Reserve Board, showing the limits of what states, other than the United States, can do to bailout financial corporations. For the periphery economies, the euro zone crisis recreated pre-monetary union problems with capital flight in a new form and created a new problem around access to emergency credit that led directly to a loss of economic and political autonomy. As international market-based banking took hold across advanced-country economies, European banks stood at the centre of a large increase in international capital flows. Acute disruption of these flows was central to the experience of large French, German and UK banks during the 2007–2008 financial crisis and the euro zone crisis and to the euro zone periphery during the euro zone crisis. The crises around these flows show the explanatory importance of structural external constraints in understanding the economic and political predicaments of financialised economies both in terms of destabilising international financial markets and the power dynamics created by access to emergency credit.