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on European Economics |
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Issue of 2015‒03‒27
twelve papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics); Rafał Trzeciakowski (Warsaw School of Economics) |
| Abstract: | We estimate various panel fiscal reaction functions, including those of main categories of general government revenue and expenditure for 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government non-investment expenditure and direct taxes. In contrast, in the core member states ,which did not benefit from yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased during 1996-2007. It was achieved mainly through pronounced adjustments in government non-investment expenditure. Our findings are in accordance with predictions of theoretical model by Aguiar et al. (2014) and are robust to various changes in modelling approach. |
| Keywords: | fiscal reaction function, sovereign bond yields’ convergence, fiscal adjustment composition. |
| JEL: | C23 E62 F34 H63 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ais:wpaper:1501&r=eec |
| By: | Harashima, Taiji |
| Abstract: | This paper theoretically examines a way out of the euro crisis based on a model of inflation acceleration and differentials. The conclusion is that, unless more advantaged states (e.g., Germany) systematically transfer a necessary amount of money to less advantaged states (e.g., Greece) in every period, the euro area cannot necessarily reach equilibrium where all heterogeneous states achieve optimality. In this case, fiscal transfers are not a tool of risk-sharing or a buffer against asymmetric shocks; rather, they are indispensable for escaping from indefinite disparity acceleration within a union consisting of heterogeneous member states. Such fiscal transfers should not be viewed as alms for the less advantaged states but as a right these states should justly assert. The model indicates that the lack of a fiscal transfer mechanism inevitably generates inflation differentials and huge current account imbalances among member states. As a result, although relatively more advantaged member states obtain “extra” benefits from the euro, less advantaged member states eventually lose most of their capital ownership and their economies are devastated. |
| Keywords: | The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal transfer; Time preference |
| JEL: | E31 E58 E63 F33 N14 O52 |
| Date: | 2015–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63025&r=eec |
| By: | Jana Juriová (VÅ B - Technical University of Ostrava) |
| Abstract: | The role of foreign sentiment is researched for explaining macroeconomic fluctuations in small open economy. The main goal is to find out whether the domestic variables react significantly to the shocks in the foreign sentiment. For this purpose a structural vector autoregression model is constructed for the Czech Republic and the Slovak Republic including relations between foreign environment and domestic variables. Both small open economies considered are highly dependent on foreign demand from euro area. Therefore the foreign development is represented by real GDP in euro area and alternatively is explored the possibility to replace foreign real GDP by economic sentiment indicator of euro area as sentiment indicators are available in advance. The impact of foreign shocks is examined by impulse response functions on the following domestic variables – real gross domestic product, consumer prices and effective exchange rate against euro area trading partners. The study confirms that foreign economic sentiment can be used for explaining fluctuations of domestic variables of a small open economy. |
| Keywords: | economic sentiment indicator, structural vector autoregression, variance decomposition, impulse response functions |
| JEL: | C51 E32 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:0902838&r=eec |
| By: | Irina Bilan (\); Iulian Ihnatov (\) |
| Abstract: | The recent European sovereign debt crisis proved public debt issues should not be easily approached. While, prior to the crisis, public debt was of little concern in most of the developed European countries, as there had been no recent episodes of sovereign default, the crisis revived longtime forgotten memories. It once again proved that, although at different debt levels, just like the developing countries the developed ones should fear high public debts and that public debt is almost always a two-sided story: although public indebtedness can promote economic growth, especially when debt resources are used for financing public investment expenditure, when the debt is very high it can negatively affect economic growth.Against this background, in this paper we aim to study the relationship between public debt and economic growth for a panel of 33 European countries (28 European Union Member States and 5 candidate countries to European accession) over the period 1990-2011. More specifically, we investigate if there is evidence of a non-linear (quadratic) relationship, both for the entire European countries group and for the developed and developing countries subgroups. The main sources of data are World Bank’s World Development Indicators and International Monetary Fund’s World Economic Outlook and Historical Public Debt datasets.The results of our study confirm the existence of a „U inverted†relationship, with a maximum debt threshold of about 94% of GDP. After this threshold public debt is expected to negatively affect the economic growth rate, due to higher interest rates, fear of public debt unsustainability and severe budgetary consolidation measures. However, this threshold is found to be more than twice lower in developing European countries compared to the developed ones, as the former enjoy lower credibility, higher vulnerability to shocks and depend more on external capital transfers. |
| Keywords: | public debt, economic growth, public policy, developed European countries, developing European countries |
| JEL: | H63 E60 O40 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:0902980&r=eec |
| By: | Merike Kukk (Tallinn University of Technology) |
| Abstract: | This paper studies the interdependence of households’ financial assets and liabilities in European countries. Most studies treat household liabilities as negative assets and relate households’ decisions to their net wealth. However, the components of net wealth, i.e. financial liabilities, financial assets and real assets are very heterogeneous across households. The assumption of similar consumption behaviour among households with the same net wealth but different wealth components is implausible. This paper raises another question, namely whether households consider their indebtedness when they make decisions about their financial assets. The implication of household indebtedness for household behaviour is an important topic as household debt volumes have increased markedly in developed countries over the last three decades. There is a long list of research about household borrowing and the financial vulnerability of indebted households, but there has been less discussion about whether and how indebtedness affects households’ behaviour beyond their borrowing decisions. The indebtedness has implications for households’ consumption behaviour as well as for their choices regarding financial assets. There is a lack of empirical evidence on the effect of indebtedness on households’ financial asset holdings in the middle of a recession. This paper sheds more light on the relationship between liabilities and financial asset holdings. The paper uses data from the recently introduced Household Finance and Consumption Sur-vey. The paper uses the first wave of the HFCS, which was implemented in 2009-2010 in 13 euro area countries. A system of equations for financial liabilities and financial assets is esti-mated while allowing for endogeneity of the two wealth components. Furthermore, selection bias issues are addressed by estimating the control equation for the selection model of debt ownership. The results suggest that households’ liabilities impact households’ financial assets negatively while no significant effect was found from financial assets to liabilities. The nega-tive impact of liabilities on financial assets remains after controls for the debt service burden and for saving to pay back debt are included. The results are confirmed by a large number of robustness tests. The findings provide empirical evidence for the theoretical assumption that credit markets reduce the holdings of financial assets of households. The results posit that increasing volumes of household debt are followed by lower incentives to keep financial assets. It is particularly important to understand how households’ liabilities affect their other financial decisions as the penetration of debt and the volumes of debt have increased. |
| Keywords: | household debt, household wealth, financial assets, liabilities, financial vulnerability |
| JEL: | D14 E21 D12 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:0100418&r=eec |
| By: | Jon Bakija (Williams College); Ivan Badinski (The Analysis Group) |
| Abstract: | In almost all countries that operate a value-added tax (VAT), the VAT “zero-rates†exports, meaning that exporting firms can claim credit for VAT on their inputs, but pay no VAT on sales of exports. This is necessary when the goal is to make the base of the tax domestic consumption. A consequence is that firms can reduce their tax burdens by misreporting some of their sales to domestic consumers as exports. In principle, reported exports from country i to country j should match up with reported imports into country j from country i, except for measurement errors, and costs of insurance and freight that are included in import value but not export value. VAT evasion can be another source of discrepancy which would tend to cause reported exports to exceed reported imports for trade flows in the same direction. We use data on such discrepancies in trade flows between pairs of European Union member countries during 1984 through 2011 to infer whether higher VAT rates are associated with greater over-reporting of exports. A difference-in-differences identification strategy, exploiting the fact that VAT rates changed in different ways over time in different countries, suggests that each percentage point increase in the exporting country’s standard VAT rate increases the discrepancy of exports over imports by about 1.1 percent of exports. For the typical EU-15 country, this implies that at the margin, about 15 percent of the static revenue gain from a VAT rate increase would be lost due to this particular channel for VAT evasion. |
| Keywords: | value added tax, exports, evasion |
| JEL: | H2 H26 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2014-06&r=eec |
| By: | Nicola Branzoli (Banca d'Italia); Giovanni Guazzarotti (Banca d'Italia) |
| Abstract: | The paper describes the characteristics of the market for private placements and discusses the necessary conditions for their uptake in Europe. A private placement is a method of financing used mainly by medium-sized companies which, unable to access the public bond market, turn to one or more large institutional investors. Compared to a public offering, a private placement is characterized by: i) lower costs of issue, ii) greater contractual flexibility, iii) lower size and lower secondary market liquidity, iv) lower information asymmetry between investors and issuers. The development of the market for private placements, one of the European Commission’s initiatives for the Capital Markets Union, can help companies to finance long-term investments and contribute to the development of the public bond market. A wider use of private placements in Europe is hindered by the fact that non-bank intermediaries are small in size, there is a lack of financial information about medium-sized companies, and the regulations and market practices across Europe are not yet sufficiently harmonized. |
| Keywords: | debt financing, corporate bonds, private placement |
| JEL: | G23 G24 G28 G32 G38 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_262_15&r=eec |
| By: | Stanova, Nadja |
| Abstract: | This paper analyses in a VAR framework with debt feedback effects of fiscal policy over 1999q1-2013q4 in five Central and East European economies: Slovakia, Czech republic, Hungary, Slovenia and Lithuania. The results are compared to two alternative specifications, a model without debt feedback, and a model with debt within the linear VAR. Omitting the debt feedback would affect the magnitude and sign of the impulse response coefficients, especially those of GDP, government revenue and interest rate. Simulated out-of-sample debt paths are stabilised if debt feedback is included, but strongly explosive otherwise. |
| Keywords: | fiscal policy, structural VAR, debt dynamics, endogenous debt feedback, impulse response functions, historical decomposition of times series, meta-analysis, CEE countries, new EU member states |
| JEL: | C32 E37 E62 H63 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63148&r=eec |
| By: | Cristina Fabrizi; Raffaella Pico; Luca Casolaro; Mariano Graziano; Elisabetta Manzoli; Sonia Soncin; Luciano Esposito; Giuseppe Saporito; Tiziana Sodano (Bank of Italy) |
| Abstract: | The supply chain of the real estate sector accounts for one fifth of Italian GDP; its importance for the banking system is even greater: lending to this sector accounts for more than one third of total loans to the private sector. The crisis in the construction and real estate sector started even before the global financial crisis of 2008 and hit firms in the sector and the banks that finance them. The fall in turnover and profitability has greatly increased the economic and financial vulnerability of firms, undermining their ability to repay their debt, particularly, in the case of large and highly leveraged firms. Due to the increase of loans classified as bad debts, the banking system has tightened conditions on new loans to this sector |
| Keywords: | Real estate cycle, trades, quotes, construction companies and real estate services, bank loans |
| JEL: | E01 G21 L74 L85 R21 R31 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_263_15&r=eec |
| By: | Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Immacolata Marino (Università di Napoli Federico II and CSEF); Mario Padula (Università della Svizzera italiana and CSEF) |
| Abstract: | In this paper we review household saving and debt trends in Italy. We summarize the available empirical evidence on Italians' motives to save, relying on macroeconomic indicators and data drawn from the Bank of Italy's Surveys of Household Income and Wealth from 1984 to 2012. The macroeconomic data indicate that households' saving has dropped significantly, although Italy continues to rank above most other countries for saving. Using microeconomic data we examine four indicators of household financial conditions: propensity to save, proportion of households with negative saving, proportion of households with debt, and proportion of households that lack access to formal credit markets. An international comparison shows that the level of debt and default risk among Italian households are relatively low. However, in light of the deep changes made to the Italian pension system, the fall in saving is a concern, particularly in the case of individuals who entered the labor market after the 1995 reform who have experienced the largest decline in pension wealth. |
| Keywords: | household saving, household debt, financial fragility, pension reforms |
| Date: | 2015–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:395&r=eec |
| By: | Swati Dhingra; Gianmarco I. P. Ottaviano; Thomas Sampson |
| Abstract: | We analyze the effects of Brexit on the UK economy. The most important economic consequence of Brexit would likely be reduced trade with EU countries. We consider an optimistic scenario with relatively small increases in trade barriers between the UK and the EU and a pessimistic scenario with larger rises. In the optimistic scenario Brexit reduces UK income per capita by 1.1% and in the pessimistic scenario income per capita falls by 3.1%. The effect of Brexit on FDI and migration would impose additional costs on the UK and following Brexit the UK would not benefit from future EU free trade agreements such as the Transatlantic Trade and Investment Partnership currently being negotiated with the United States. |
| Keywords: | Trade, European Union, welfare, Brexit, #ElectionEconomics, government policy, 2015 general election |
| JEL: | F13 F17 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepeap:022&r=eec |
| By: | Huotari , Jarkko (Aalto University) |
| Abstract: | I propose a financial stress index (FSI) for the Finnish financial system that aims to reflect the functionality of the financial system and provide an aggregate measure of financial stress in the money, bond, equity and foreign exchange markets and the banking sector. The FSI is a composite index that combines information from these markets and provides a measure of stress in the financial system as a whole. The FSI has obvious benefits for all participants in the financial markets who need a tool for monitoring the functioning of the financial markets, as it provides information on systemic stress events which are not as easily captured with the stress measures of individual markets or sectors. The ESRB recommendation (ESRB, 2014a) also states that national or international FSIs could be used when making a decision about the release of the counter-cyclical capital buffer. Hence, the index can also be used to support the macro-prudential policy decision making in Finland. |
| Keywords: | financial stress index; counter-cyclical capital buffer; macro-prudential policy |
| JEL: | C43 G01 G28 |
| Date: | 2015–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_007&r=eec |