nep-eec New Economics Papers
on European Economics
Issue of 2015‒04‒02
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The macroeconomic effects of the sovereign debt crisis in the euro area By Stefano Neri; Tiziano Ropele
  2. Europe's Long-Term Growth Prospects: With and Without Structural Reforms By Kieran McQuinn; Karl Whelan
  3. Escape routes from sovereign default risk in the euro area By Semmler, Willi; Proaño, Christian R.
  4. Inflation surprises and inflation expectations in the euro area By Marcello Miccoli; Stefano Neri
  5. Cross-Border Banking and Business Cycles in Asymmetric Currency Unions By Lena Dräger; Christian R. Proaño
  6. The financial stability risks of ultra-loose monetary policy By Grégory Claeys; Zsolt Darvas
  7. Offshoring and Labour Market Reforms: Modelling the German Experience By Beissinger, Thomas; Chusseau, Nathalie; Hellier, Joël
  8. Concerns about the Euro and Happiness in Germany during Times of Crisis By Adrian Chadi
  9. The European Youth Guarantee: Labor Market Context, Conditions and Opportunities in Italy By Pastore, Francesco
  10. Decomposition of Unemployment: The Case of the Visegrad group countries By Michal Tvrdoň
  11. Living (dangerously) without a fiscal union By Ashoka Mody
  12. The Equity-like Behaviour of Sovereign Bonds By Alfonso Dufour; Andrei Stancu; Simone Varotto
  13. Fiscal Policy Matters A New DSGE Model for Slovakia By Zuzana Mucka; Michal Horvath
  14. Financing energy and low-carbon investment: public guarantees and the ECB By Michel Aglietta; Étienne Espagne
  15. Fiscal targets. A guide to forecasters? By Joan Paredes; Javier J. Pérez; Gabriel Perez-Quirós
  16. Immigration Policy and Macroeconomic Performance in France By Ekrame BOUBTANE; Dramane COULIBALY; Hippolyte D'ALBIS
  17. 'Growth in a Time of Austerity: Evidence From the UK' By Jurgen Amann; Paul Middleditch

  1. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: This paper uses a Factor Augmented Vector Autoregressive model to assess the macroeconomic impact of the euro-area sovereign debt crisis and the effectiveness of the European Central Bank's conventional monetary policy. First, our results show that in the countries most affected by the crisis, the tensions in sovereign debt markets made credit conditions significantly worse and weighed on economic activity and unemployment. The disruptive effects of the sovereign tensions propagated to the core economies of the euro area through the trade and confidence channels. Second, "modest" (in the sense of Leeper and Zha, 2003) counterfactual simulations suggest that the accommodative monetary policy stance of the ECB helped to moderate the negative effects of the sovereign debt tensions.
    Keywords: sovereign debt crisis, FAVAR models, Bayesian methods, monetary policy
    JEL: C32 E44 E52 F41
    Date: 2015–03
  2. By: Kieran McQuinn (Economic and Social Research Institute); Karl Whelan (University College Dublin)
    Abstract: Even before the financial crisis of 2007/08, there were significant questions about Europe's long-term growth prospects. After a long period of catching up with US levels of labour productivity, euro area productivity growth had, from the mid-1990s onwards, fallen significantly behind. Using data for the period 1970 to 2006, McQuinn and Whelan (2008) identified declining rates of total factor productivity (TFP) growth and weaker capital accumulation as areas for concern in an European context. In updating this earlier analysis, we find that the growth prospects of the euro area have deteriorated further. With TFP growth contin- uing to fall, Europe's demographics are now also contributing to a decline in the workforce. Against this backdrop, we provide a long-term projection for euro area GDP based on unchanged policies and discuss the possible impacts of certain structural reforms including potential changes in the unemployment rate, pension reform and the successful implementation of a significant wider programme of regulatory reform that boosts TFP growth. We argue that, even with the successful adoption of these measures, the European economy is still likely to grow at a slower pace than it has in the past.
    Keywords: Growth, Euro Area, Demographics, Structural Reforms
    JEL: O40 O47 O16
    Date: 2015–03–20
  3. By: Semmler, Willi; Proaño, Christian R.
    Abstract: The recent financial and sovereign debt crises around the world have sparked a growing literature on models and empirical estimates of defaultable debt. Frequently households and firms come under default threat, local governments can default, and recently sovereign default threats were eminent for Greece and Spain 2012-13. Moreover, Argentina experienced an actual default in 2001. What causes sovereign default risk, and what are the escape routes from default risk? Previous studies such as Arellano (2008), Roch and Uhlig (2013) and Arellano et al. (2014) have provided theoretical models to explore the main dynamics of sovereign defaults. These models can be characterized as threshold models in which there is a convergence toward a good no-default equilibrium below the threshold and a default equilibrium above the threshold. However, in these models aggregate output is exogenous, so that important macroeconomic feedback effects are not taken into account. In this paper, we 1) propose alternative model variants suitable for certain types of countries in the EU where aggregate output is endogenously determined and where financial stress plays a key role, 2) show how these model variants can be solved through the Nonlinear Model Predictive Control numerical technique, and 3) present some empirical evidence on the nonlinear dynamics of output, sovereign debt and financial stress in some euro area and other industrialized countries.
    Keywords: sovereign default risk,financial stress,macroeconomic dynamics,euro crisis
    JEL: E44 E62 H63
    Date: 2015
  4. By: Marcello Miccoli (Bank of Italy); Stefano Neri (Bank of Italy)
    Abstract: Since 2013 the inflation rate in the euro area has fallen steadily, reaching all-time lows at the end of 2014. Market-based measures of inflation expectations (such as inflation swaps) have also declined to extremely low levels, which suggests increasing concern about the credibility of the ECB in maintaining price stability. Inflation releases have often surprised analysts on the downside. Our analysis shows that market-based inflation expectations, at medium-term maturities, are affected by these ‘surprises’, over and above the impact of changing macroeconomic conditions and oil prices.
    Keywords: inflation, inflation expectations, inflation swap contracts
    JEL: E31 E52 C22 C31
    Date: 2015–03
  5. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Christian R. Proaño (The New School for Social Research)
    Abstract: Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank’s leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modelled by letting the loan-to-value (LTV) ratio that banks demand of entrepreneurs depend on either regional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context.
    Keywords: Cross-border banking, euro area, monetary unions, DSGE
    JEL: F41 F34 E52
    Date: 2015–03
  6. By: Grégory Claeys; Zsolt Darvas
    Abstract: â?¢ Ultra-loose monetary policies, such as very low or even negative interest rates, large-scale asset purchases, long-maturity lending to banks and forward guidance in central bank communication, aim to increase inflation and output, to the benefit of financial stability. But at the same time, these measures pose various risks and might create challenges for financial institutions. â?¢ By assessing the theoretical literature and developments in the United States, United Kingdom and Japan, where very expansionary monetary policies were adopted during the past six years, and by examining the euro-area situation, we conclude that the risks to financial stability of ultra-loose monetary policy in the euro area could be low. However, vigilance is needed. â?¢ While monetary policy should focus on its primary mandate of area-wide price stability, other policies should be deployed whenever the financial cycle deviates from the economic cycle or when heterogeneous financial developments in the euro area require financial tightening in some but not all countries. These policies include micro-prudential supervision, macro-prudential oversight, fiscal policy and regulation of sectors that pose risks to financial stability, such as construction.
    Date: 2015–03
  7. By: Beissinger, Thomas (University of Hohenheim); Chusseau, Nathalie (University of Lille 1); Hellier, Joël (LEMNA - University of Nantes)
    Abstract: A usual interpretation of the high performance of the German economy since 2005 is that the Hartz labour market reforms have boosted German competitiveness, resulting in higher exports, higher production and lower unemployment. This explanation is at odds with the sequence of observed facts. We propose and model an alternative scenario in which offshoring explains the gains in competitiveness but increases unemployment and inequality, and the subsequent labour market reforms lower unemployment by lessening the reservation wage and expanding the non-tradable sector. The model replicates the developments of the German economy since 1995: 1) Germany offshores more intensively than other advanced countries; 2) The increase in competitiveness and in the exports/production ratio occurs before the implementation of the labour market reform, and this comes with both higher inequality and higher unemployment; 3) The implementation of the reform reduces unemployment, but also decreases the exports/production ratio and increases inequality. The model also predicts that the reduction in unemployment in Germany would have occurred without the Hartz reforms, but later and less intensively. We finally discuss the possible extension of this 'strategy' to other Eurozone countries, and alternative policies that activate similar mechanisms without increasing inequality.
    Keywords: Germany, inequality, labour market reform, offshoring, unemployment
    JEL: H55 J31 J65
    Date: 2015–03
  8. By: Adrian Chadi (Institute for Labour Law and Industrial Relations in the EU, University of Trier)
    Abstract: This empirical study investigates if people’s concerns about the euro currency affect their life satisfaction. A minority of very concerned individuals appear to be unhappy, which cannot be explained by personality or other observable factors typically affecting well-being. As a novelty, this investigation exploits exogenous variation in reported concerns by using the intensity of media coverage on the euro crisis with its extraordinary events throughout the year 2011 as an instrument. Results from the application of several empirical approaches confirm that there is an effect from being concerned about the euro on people’s satisfaction with life. The first potential explanation is that perceived economic insecurity works as a transmission channel, but this is not fully supported by the empirical evidence. A second explanation suggests that political beliefs and euro-skeptic attitudes are at play and may trigger unhappiness as a consequence of a perceived lack of representation in German politics. In line with this argument, a regional analysis links the variation in unhappiness among concerned citizens to the actual votes for Germany’s first major anti-euro party in the subsequent federal elections.
    Keywords: Life satisfaction, euro crisis, currency, concerns, political protest, sensitive information, media coverage, instrumental variable, SOEP
    JEL: D72 H11 I31
    Date: 2015–03
  9. By: Pastore, Francesco (University of Naples II)
    Abstract: This essay aims to discuss the conditions for a successful implementation of the European Youth Guarantee in Italy. In principle, the program should be able to affect the frictional and mismatch components of unemployment, if not the Keynesian and neoclassical ones, as also the experience of Scandinavian countries suggests. However, this requires an in-depth transformation of the entire school-to-work transition system, involving not only public employment services, but also educational and training systems. To tackle the Keynesian and neoclassical components of unemployment, instead, it is vital to rethink the European austerity and reduce the labor wedge.
    Keywords: European Youth Guarantee, European Social Model, school-to-work transition, youth unemployment, youth experience gap, Keynesian unemployment, neoclassical unemployment, mismatch and frictional unemployment, Italy
    JEL: E12 E62 H52 J13 J24
    Date: 2015–03
  10. By: Michal Tvrdoň (Departament of Economics and Public Administration, School of Business Administration, Silesian University)
    Abstract: Generally, economic performance declines and the unemployment rate rises during the economic crisis. This relationship was confirmed in the past several crises. Moreover, we can decompose unemployment into several components – seasonal, cyclical and structural. The aim of the paper is to decompose unemployment and we try to estimate the rate of structural unemployment. Quarterly data from the Eurostat database in the period between 2000 and 2012 were applied. In order to estimate the trend of the unemployment rate´s development was used Hodrick-Prescott filter. Data show that all observed economies recorded a low unemployment rate in a pre-crisis period and they had to face worsened labour market performance during and after the crisis. Our results suggest that structural component seems to be the most important component of unemployment. Moreover, it has decreased in these countries, except Hungary. We also compared our method with OECD estimations and we can state that these approaches lead to analogous results.
    Keywords: Hodrick-Prescott filter; Kalman filter; NAIRU; structural unemployment
    JEL: C82 J64
    Date: 2015–03–26
  11. By: Ashoka Mody
    Abstract: The euro areaâ??s political contract requires member nations to rely principally on their own resources when confronted with severe economic distress. Since monetary policy is the same for all, national fiscal austerity is the default response to counter national fiscal stress. Moreover, the monetary policy was itself stodgy in countering the crisis, and banking-sector problems were allowed to fester. And it was considered inappropriate to impose losses on private sector creditors. Thus, the nature of the incomplete monetary union and the self-imposed taboos led deep and persistent fiscal austerity to become the norm. As a consequence, growth was hurt, which undermined the primary objective of lowering the debt burden. To prevent a meltdown, distressed nations were given official loans to repay private creditors. But the stress and instability continued and soon it became necessary to ease the repayment terms on official loans. When even that proved insufficient, the German-inspired fiscal austerity was combined with the deep pockets of the European Central Bank. The ECBâ??s safety net for insolvent or near-insolvent banks and sovereigns, in effect, substituted for the absent fiscal union and drew the central bank into the political process.
    Date: 2015–03
  12. By: Alfonso Dufour (ICMA Centre, Henley Business School, University of Reading); Andrei Stancu; Simone Varotto
    Abstract: Using a rich dataset of high frequency historical information we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the importance of the equity risk factor varies greatly over time and crucially depends on country risk. In low risk countries, government bond returns are negatively related to equity returns, regardless of market conditions. Investors appear to migrate from low risk government bonds to stocks in calm periods and in the opposite direction when markets are under stress. On the other hand, government bonds of high risk countries lose their “safe-asset” status and exhibit more equity- like behaviour during the sovereign debt crisis, with positive and strongly significant co- movements relative to the stock market. Interestingly, this segmentation of the government bond market results in higher diversification benefits for fixed income investors and pension funds in periods of sovereign stress.
    Keywords: government bonds, subprime crisis, sovereign debt crisis, credit risk, liquidity risk, asset pricing
    JEL: G01 G12 G15 E43
    Date: 2014–12
  13. By: Zuzana Mucka (Council for Budget Responsibility); Michal Horvath (Council for Budget Responsibility)
    Abstract: The paper sets out a DSGE model designed and calibrated to match key stylized facts about the Slovak economy. The model includes a detailed fiscal policy block that allows a thorough analysis of fiscal policy measures. To evaluate the performance of the model, the response of the economy to a technology shock and to a foreign demand shock is considered under alternative fiscal adjustment scenarios. We find that a well-designed programme involving increases in transfers as well as taxes can stabilize the economy in the short run and improve longer-term growth prospects following a shock with adverse fiscal implications. We study the consequences of fiscal policy shocks in and away from the steady state of the model. The exercise yields implied fiscal multipliers that are large in spite of Slovakia being a small open economy. Cutting infrastructure spending or raising taxes on consumption and employment are particularly bad for the real economy in a recession.
    Keywords: dynamic stochastic general equilibrium model, simulations, fiscal rules, fiscal multipliers, fiscal consolidation
    JEL: E32 C61 C63 D58 E62 H63 H5
    Date: 2015–03
  14. By: Michel Aglietta; Étienne Espagne
    Abstract: The eurozone has been said to have caught a disease called "secular stagnation". Productive investment in the private sector fell by about 20% overall between 2007 and 2014, while private saving has surged, creating a huge gap between gross domestic savings and investment. The trajectory of actual GDP has decoupled from successive estimates of potential GDP, and there is no sign of a spontaneous short-term adjustment. The engineering of a powerful investment drive seems the only way out of this self-fulfilling low-growth trap. The European Union has already set investment objectives in the Climate and Energy Package. These targets cover four areas: renewable energy supply capacity, electricity distribution networks, energy efficiency in building renovation and urban mobility. Several financing tools need to be combined to tailor risk-sharing devices for investments in each of these sectors. First and foremost, is the integration of a high carbon price. However, as any sudden sharp increase in the overall carbon price would have a major (and politically unsustainable) impact on the rest of the economy, a core issue is how to create a transitory distinction between the carbon price included/paid by the existing capital stock and the carbon price included/paid by new low carbon investments. This can be achieved through a two-tier approach. First, for the four key sectors, a high notional carbon price is used to set an asset value on the carbon saved by new investments ("carbon asset"): these assets are accepted as repayment by central banks, and publically guaranteed. The ECB, by buying financial instruments issued by the low-carbon investors, creates a direct transmission channel to these areas of the economy. Second, fiscal measures ensure the carbon price catches up with the notional value, thus generating revenues that allow for the purchase of the carbon debt held by the central banks, guaranteeing the final budget neutrality of the process. By focusing on investments in these four sectors, the European output gap could be closed in the short run and a credible path opened to a low carbon economy.
    Keywords: Ecular Stagnation;Social Cost of Carbon;Certification;Low Carbon Transition
    JEL: Q43 Q48
    Date: 2015–03
  15. By: Joan Paredes (European Central Bank); Javier J. Pérez (Banco de España); Gabriel Perez-Quirós (Banco de España, AIREF and CEPR)
    Abstract: Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental in unveiling the current course of policy in real time. Our approach complements a well-established branch of the literature that finds politically motivated biases in policy targets.
    Keywords: policy credibility, fiscal policy, forecasting
    JEL: C54 H30 H68 E61 E62
    Date: 2015–03
  16. By: Ekrame BOUBTANE (Centre d'Etudes et de Recherches sur le Développement International); Dramane COULIBALY; Hippolyte D'ALBIS
    Abstract: This paper quantitatively assesses the interaction between permanent immigration into France and France's macroeconomic performance as seen through its GDP per capita and its unemployment rate. It takes advantage of a new database where immigration is measured by the flow of newly- issued long-term residence permits, categorized by both the nationality of the immigrant and the reason of permit issuance. Using a VAR model estimation of monthly data over the period 1994-2008, we find that immigration flow significantly responds to France's macroeconomic performance: positively to the country's GDP per capita and negatively to its unemployment rate. At the same time, we find that immigration itself increases France's GDP per capita, particularly in the case of family immigration. This family immigration also reduces the country's unemployment rate, especially when the families come from developing countries.
    Keywords: immigration, Female and Family Migration, growth, Unemployment, VAR Models
    JEL: J61 F22 E20
    Date: 2015–03
  17. By: Jurgen Amann; Paul Middleditch
    Abstract: A recent recovery in the United Kingdom comes after a program of austerity measures announced by the incoming coalition government in 2010. Can the recent pick up in economic activity be attributed to this controversial fiscal policy? This paper uses an empirical approach to test the causal relationship between debt and growth for the case of the UK using monthly time series data between 1995 and 2013. This time series perspective makes use of Granger-causality and co-integration tests that allow for non-stationarity in macroeconomic time series data. We find that controlling for structural breaks in this way leads us to the finding of no empirical support for the hypothesis that fiscal discipline can restore economic activity after a recession.
    Date: 2015

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