Issues in Monetary and Fiscal Policy in the Eurozone: An Empirical Investigation

The first chapter investigates how conventional and unconventional monetary policies announcements affect European banking indexes returns through an event-study analysis. We use data of 11 European banking indices for the periods 1999-2015. We examine the state dependency of such effects and focus on the surprise elements of policy changes derived from the Euribor futures market. Overall, we find a positive relation between the unexpected changes in the ECB’s reference rate and European banking indices returns. We also discover that the effect is stronger during the financial crisis, especially during the sovereign debt crisis. Moreover, we identify a positive relation between the announcements of unconventional policies and the European banking indices returns, particularly where the banking system was riskier such as Spain, France and Italy but with a low degree of magnitude than expected. Hence, the Euro banks reactions to monetary policies announcements seem to be more relevant through conventional measures with respect to non-conventional ones. Another policy concern that is high on the agenda of all the Eurozone Countries and especially of the European Commission and the European Parliament is the use of the fiscal stimulus as the stabilization tool for the economy and its sustainability in the aftermath of the global economic downturn. The second chapter undertakes to fix these issues. During the sovereign debt crisis, all euro countries have deployed ``austerity packages", believing that they could regain the path of growth implementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recovery and a reduction of the debt to gdp ratio. A key issue is the size of fiscal multipliers when the economy is in recession. We estimate a nonlinear model allowing variations based on the state of the economy and we control for the macroeconomic characteristics across the Euro Area. The empirical evidence suggests that, an increase in government spending will be particularly effective to boost aggregate demand, increase private consumption and investment in the short-to-medium run, without raising the debt to gdp ratio but rather decreasing it.