nep-eec New Economics Papers
on European Economics
Issue of 2015‒01‒19
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The retail bank interest rate pass-through: The case of the euro area during the financial and sovereign debt crisis By Darracq Pariès, Matthieu; Moccero, Diego; Krylova, Elizaveta; Marchini, Claudia
  2. Potential output from a euro area perspective By Anderton, Robert; Aranki, Ted; Dieppe, Alistair; Elding, Catherine; Haroutunian, Stephan; Jacquinot, Pascal; Jarvis, Valerie; Labhard, Vincent; Rusinova, Desislava; Szörfi, Béla
  4. Austerity, cyclical adjustment and the remaining leeway for expansionary fiscal policies in the Euro area By Achim Truger
  5. A feasible unemployment-based shock absorber for the Euro Area By Andrea Brandolini; Francesca Carta; Francesco D'Amuri
  6. The European Commission’s New NAIRU: Does it Deliver? By Sebastian Gechert; Katja Rietzler; Silke Tober
  7. Disaggregating Okun's law: decomposing the impact of the expenditure components of GDP on euro area unemployment By Anderton, Robert; Aranki, Ted; Bonthuis, Boele; Jarvis, Valerie
  8. Effectiveness and transmission of the ECB’s balance sheet policies By Jef Boeckx; Maarten Dossche; Gert Peersman
  9. Within- and cross-country price dispersion in the euro area By Reiff, Adam; Rumler, Fabio
  10. Updating the euro area Phillips curve: the slope has increased By Oinonen, Sami; Paloviita, Maritta
  11. An Unemployment Insurance Scheme for the Euro Area: A simulation exercise of two options By Beblavý, Miroslav; Maselli, Ilaria
  12. The interest-rate sensitivity of the demand for sovereign debt. Evidence from OECD countries (1995-2011) By Giuseppe Grande; Sergio Masciantonio; Andrea Tiseno
  13. Hysteresis in European labour market By Furuoka, Fumitaka
  14. The determinants of household debt: a cross-country analysis By Massimo Coletta; Riccardo De Bonis; Stefano Piermattei
  15. A Fiscal Job? An Analysis of Fiscal Policy and the Labor Market By Elva Bova; Christina Kolerus; Sampawende J.-A. Tapsoba

  1. By: Darracq Pariès, Matthieu; Moccero, Diego; Krylova, Elizaveta; Marchini, Claudia
    Abstract: This paper analyses the cross-country heterogeneity in retail bank lending rates in the euro area and presents newly developed pass-through models that account for the riskiness of borrowers, the balance sheet constraints of lenders and sovereign debt tensions affecting interest rate-setting behaviour. Country evidence for the four largest euro area countries shows that downward adjustments in policy rates and market reference rates have translated into a concomitant reduction in bank lending rates. In the case of Spain and Italy, however, sovereign bond market tensions and a deteriorating macroeconomic environment have put upward pressure on composite lending rates to non-financial corporations and households. At the same time, model simulations suggest that higher lending rates have propagated to the broader economy by depressing economic activity and inflation. As a response to increasing financial fragmentation, the ECB has introduced several standard and non-standard monetary policy measures. These measures have gone a long way towards alleviating financial market tensions in the euro area. However, in order to ensure the adequate transmission of monetary policy to financing conditions, it is essential that the fragmentation of euro area credit markets is reduced further and the resilience of banks strengthened where needed. Simulation analysis confirms that receding financial fragmentation could help to boost economic activity in the euro area in the medium term. JEL Classification: J64
    Keywords: bank lending rates, DSGE models, financial fragmentation, monetary policy, pass-through models
    Date: 2014–09
  2. By: Anderton, Robert; Aranki, Ted; Dieppe, Alistair; Elding, Catherine; Haroutunian, Stephan; Jacquinot, Pascal; Jarvis, Valerie; Labhard, Vincent; Rusinova, Desislava; Szörfi, Béla
    Abstract: This paper reviews potential output from a euro area perspective by summarising the developments according to international institutions and assessing the impact of the crisis. The paper also considers the methodological basis for potential output estimates, and the high degree of uncertainty that surrounds them. Although it is too early to see the full effects of structural reforms implemented since 2007/08, further structural reforms are needed to support euro area potential growth, especially in view of the negative impact that population ageing is expected to have on potential growth in the future. JEL Classification: C5, E6, C62
    Keywords: output gap, potential output, production function, structural reforms
    Date: 2014–11
  3. By: Tatiana Cesaroni (Bank of Italy); Roberta De Santis (ISTAT)
    Abstract: The neoclassical and OCA theories predict that higher capital market openness, providing better risk sharing opportunities, should enable catching up and convergence among countries. However, starting from ‘90s, Current Account (CA) dispersions within European Union (EU) member States have been progressively increasing. To shed light on this issue this paper investigates whether financial integration played a role in determining the so called Eurozone CA “core-periphery dualism”. The analysis considers two samples of 22 OECD and 15 EU countries, three time horizons corresponding to various European integration steps, different control variables and several panel econometric methods. The results suggest that within OECD and EU groups, financial integration significantly contributed to explain CA dispersion. Moreover, financial integration seems to have negatively influenced the CA balance in the peripheral countries especially in the post EMU period.
    Keywords: current accounts imbalances, financial integration, EMU, core-periphery countries, panel econometric models
    JEL: F36 F43
    Date: 2014
  4. By: Achim Truger
    Abstract: Fiscal policy in the Euro area is still dominated by austerity measures implemented under the institutional setting of the 'reformed' stability and growth pact, and the even stricter 'fiscal compact'. At the same time, calls for a more expansionary fiscal policy to overcome the economic crisis have become more frequent, recently. Therefore, the article tries to assess the remaining leeway for a truly expansionary fiscal policy within the existing institutional framework. Special emphasis is put on the method of cyclical adjustment employed by the European commission in order to assess member states’ fiscal position and effort. It turns out that even in the existing framework the leeway for a macroeconomically and socially more sensible fiscal policy using the interpretational leeway inherent in the rules is quite substantial.
    Keywords: fiscal policy, austerity, cyclical adjustment of public finances, Euro area
    JEL: E61 E62 E65 H62 H63
    Date: 2014
  5. By: Andrea Brandolini (Banca d'Italia); Francesca Carta (Banca d'Italia); Francesco D'Amuri (Banca d'Italia)
    Abstract: This paper contributes to the debate on the design of a centralised fiscal tool absorbing country-specific negative shocks in the euro area. Based on theoretical insights, it identifies the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible. It then derives empirically the combination of activation thresholds, experience rating, eligibility criteria, and benefit generosity which define the systems offering the highest stabilisation for given levels of redistribution, accounting for the large variation in benefit take-up rates across European countries. The analysis suggests that the shock absorber should: i) give rise to macro cross-national transfers, mimicking those that would be generated by a notional euro-wide unemployment benefit scheme of minimal coverage and generosity; ii) be activated by a trigger; and iii) feature partial experience rating. The simulation results, confirmed by robustness checks, show that even systems that do not redistribute resources between countries can have a considerable stabilisation impact in the medium run. Low benefit take-up in Southern Europe substantially reduces the stabilisation properties and the size of the scheme.
    Keywords: unemployment benefits, absorption of macroeconomic shocks, fiscal union.
    JEL: E6 J65 H53
    Date: 2014–11
  6. By: Sebastian Gechert; Katja Rietzler; Silke Tober
    Abstract: The NAIRU is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates – in the case of Spain from 26.6% to 20.7% for 2015. To test the dependence of the new NAIRU on unemployment versus structural factors, we run counterfactual simulations applying one-standard deviation shocks to actual unemployment and to the structural variable – real unit labor costs. We find that the NAIRU in its new specification is still largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures.
    Keywords: NAIRU, Kalman filter, output gap, euro area, structural deficit
    JEL: E23 E24 E31
    Date: 2014
  7. By: Anderton, Robert; Aranki, Ted; Bonthuis, Boele; Jarvis, Valerie
    Abstract: This paper examines the usefulness of the Okun relationship as a “rule of thumb” for predicting changes in unemployment, as a result of changes in output. It argues that a disaggregated version of the Okun relationship – making use of the differential reaction of unemployment to changes in the various expenditure components of GDP - significantly enhances the capacity of the Okun relationship (in comparison to the aggregate “rule of thumb”) for predicting movements in unemployment. The paper tests this hypothesis using a dataset for the 17 euro area countries over the period 1996Q1-2013Q4. The results suggest that euro area unemployment is particularly sensitive to movements in the consumption component of GDP, while movements in foreign trade (exports and imports) have a much lower impact on unemployment developments. This reflects the highly labour-intensive nature of the services that represent the bulk of consumers’ expenditure, while the higher productivity manufacturing-related content of exports tends to be less labour intensive. JEL Classification: E2, E24, C23
    Keywords: expenditure components of GDP, Okun relationship, panel econometrics, unemployment
    Date: 2014–12
  8. By: Jef Boeckx (Research Department, NBB); Maarten Dossche (Research Department, NBB, ECB); Gert Peersman (Ghent University)
    Abstract: We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output turn out to be smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized.
    Keywords: unconventional monetary policy, ECB blance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–12
  9. By: Reiff, Adam; Rumler, Fabio
    Abstract: Using a comprehensive data set on retail prices across the euro area, we analyse within- and cross-country price dispersion in European countries. First, we study price dispersion over time, by investigating the time-series evolution of the coefficient of variation, calculated from price levels. Second, since we find that cross-sectional price dispersion by far dominates price dispersion over time, we study price dispersion across space and investigate the role of geographical barriers (distance and national borders). We find that (i) prices move together more closely in locations that are closer to each other; (ii) cross-country price dispersion is by an order of magnitude larger than within-country price dispersion, even after controlling for product heterogeneity; (iii) a large part of cross- country price differences can be explained by different tax rates, income levels and consumption intensities. In addition, we find some indication that price dispersion in the euro area has declined since the inception of the Monetary Union. JEL Classification: E31, F41
    Keywords: border effect, international relative prices, price dispersion
    Date: 2014–11
  10. By: Oinonen, Sami (Bank of Finland Research); Paloviita, Maritta (Bank of Finland Research)
    Abstract: This paper examines recent changes in the cyclicality of euro area inflation. We estimate time-varying parameters for the hybrid New Keynesian Phillips curve using three alternative proxies for the output gap. Our analysis, which is based on the state-space method with Kalman filtering techniques, suggests that the slope of the euro area Phillips curve has become steeper since 2012. Thus, the current low level of inflation and persistently negative output gap increase the risk that euro area inflation will stay below the monetary policy target for an extended period.
    Keywords: inflation; Phillips curve; cycle
    JEL: E31 E32 E52
    Date: 2014–12–16
  11. By: Beblavý, Miroslav; Maselli, Ilaria
    Abstract: This study offers an in-depth economic analysis of the two main proposals for the creation of a European unemployment insurance scheme. One proposes the creation of a harmonised European unemployment benefit scheme that would apply automatically to every eligible unemployed person. The alternative, termed ‘reinsurance’ here, would transfer funds to national unemployment insurance schemes to finance benefits from the centre to the periphery when unemployment is measurably higher than normal. The rationale behind these proposals is to set up an EU-level shock absorber to overcome coordination failures and the crisis-budget constraints of individual countries. The authors consider the possible trade-offs and challenges of, for example, the definition of the trigger, the fiscal rule and the harmonisation of national benefits. They conclude that while both options are viable, ‘reinsurance’ offers a stronger stabilisation effect for the same amount of European distribution.
    Date: 2014–12
  12. By: Giuseppe Grande (Bank of Italy); Sergio Masciantonio (Bank of Italy); Andrea Tiseno (Bank of Italy)
    Abstract: Public debt levels in advanced economies have increased dramatically over recent years and they could put considerable upward pressure on market yields. Using a novel identification approach based on financial accounts and focusing on panel regressions for 18 advanced economies over the period 1995�2011, this paper estimates the long-term slope of the demand function for government securities in a reduced-form setting. We find that public debt does matter: each percentage point increase in the public debt to GDP ratio raises 10-year rates by about 2 basis points. The potential drag on public debt sustainability caused by the feedback loop of public debt on higher interest rates should not therefore be overlooked.
    Keywords: government debt, long-term interest rates, financial accounts
    JEL: E43 G12 H63
    Date: 2014–10
  13. By: Furuoka, Fumitaka
    Abstract: This paper revisits the hysteresis and unemployment problem in Europe by using new data and some innovative methods. Blanchard and Summers are among first researchers to detect the existence of unemployment hysteresis and to attribute the hysteresis effects to the European unemployment problem (Blanchard and Summers, 1986). Despite numerous empirical inquiries on this topic, researchers have not decided whether the hysteresis would exist in unemployment. Thus, this paper chooses five countries in the region, namely France, Germany, Italy, Spain and United Kingdom, and examines systematically their unemployment behaviours by employing several different econometric tests, such as the SUR-ADF test (Breuer et al., 2002), the Fourier ADF (FADF) test (Enders and Lee, 2012) and the SUR-Fourier ADF (SUR-FADF) test. These four tests produced consistent findings that unemployment rates in these five European countries could be described as the unit root process. In other words, these different unit root tests uniformly detected the existence of hysteresis in these five countries in line with the hysteresis hypothesis.
    Keywords: Unemployment hysteresis, Europe, unit root, nonlinear
    JEL: C22 E24
    Date: 2014
  14. By: Massimo Coletta (Bank of Italy); Riccardo De Bonis (Bank of Italy); Stefano Piermattei (Bank of Italy)
    Abstract: In most countries household debt increased from the 1990s until the crisis of 2007-2008 before stabilizing due to recession and deleveraging. However, there are national differences in household debt/GDP ratios. This paper studies the determinants of household debt, using a 32-country dataset and taking both demand-side and supply-side factors into account. The econometric exercises, covering the period 1995-2011, yield two main results. First, debt is greater in countries with higher per capita GDP and household wealth. Second, the efficacy of bankruptcy laws is correlated with the level of household debt, while a longer time to resolve insolvencies is associated with lower debt. These two institutional variables are linked to household debt more robustly than is the quality of credit registers.
    Keywords: household debt, income, wealth
    JEL: E21 G21 P5
    Date: 2014–10
  15. By: Elva Bova; Christina Kolerus; Sampawende J.-A. Tapsoba
    Abstract: This paper examines the impact of fiscal policy on employment through the lenses of Okun’s Law. Looking at the panel of OECD countries over the past three decades, we find that fiscal policy can affect employment beyond the impact it is traditionally assumed to exert through the output multiplier. In particular, this impact is found to be effective for most items of current discretionary expenditure and for corporate income taxes and social security contributions. Okun’s Law is found to be stable under almost all model specifications, but higher spending on subsidies and lower social security contributions can amplify the impact of the output gap on employment gaps.
    Keywords: Fiscal policy;Tax rates;Labor markets;Employment;OECD;fiscal policy, labor market, employment gaps
    Date: 2014–12–12

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