nep-eec New Economics Papers
on European Economics
Issue of 2015‒06‒20
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios? By Gabriela Castro; Ricardo M. Felix; Paulo Julio; Jose R. Maria
  2. Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  3. German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory By Timo Bettendorf; Miguel A. Leon-Ledesma
  4. How does labour market structure affect the response of economies to shocks? By Aurelijus Dabusinskas; István Kónya; Stephen Millard
  5. The Political Economy of European Integration By Enrico Spolaore
  6. Empirical study on the determinants of fiscal vulnerability: evidence for the European Union By Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
  7. The Influence of Media Use on Laymen’s Monetary Policy Knowledge in Germany By Bernd Hayo; Edith Neuenkirch
  8. Norwegian Rhapsody? The Political Economy Benefits of Regional Integration By Campos, Nauro F; Coricelli, Fabrizio; Moretti, Luigi
  9. Household finance and income inequality in the euro area By Oliver Denk; Alexandre Cazenave-Lacroutz
  10. Financial sector pay and labour income inequality: Evidence from Europe By Oliver Denk
  11. Finance and economic growth in OECD and G20 countries By Boris Cournède; Oliver Denk
  12. Main drivers of the recent decline in Italy’s non-construction investment By Fabio Busetti; Claire Giordano; Giordano Zevi
  13. The contradictory path of the capital accumulation process in Spain under the Euro By Mateo Tomé, Juan Pablo
  14. Short term inflation forecasting: the M.E.T.A. approach By Giacomo Sbrana; Andrea Silvestrini; Fabrizio Venditti

  1. By: Gabriela Castro (Economics and Research Department, Banco de Portugal); Ricardo M. Felix (Economics and Research Department, Banco de Portugal); Paulo Julio (Economics and Research Department, Banco de Portugal; and CEFAGE-UE, Portugal); Jose R. Maria (Economics and Research Department, Banco de Portugal)
    Abstract: Using PESSOA, a medium-scale DSGE model for a small euro-area economy, we evaluate how fiscal adjustments impact short- and medium-term debt dynamics and output for alternative policy options, and budgetary and economic conditions. Fiscal adjustments may increase the public debt-to-GDP ratio in the short run, even for consolidations carried out in normal times in economies characterized by moderate indebtedness levels. Financial turmoils and hikes in the nationwide risk premia, coupled with high indebtedness levels and stiff fiscal measures, boost the output costs of scal consolidations and severely aect their eectiveness in bringing the public debtto-GDP ratio down in the short term. In the medium run credible fiscal adjustments entail a decline in the public debt ratio, though at potentially very large output losses when carried out under unfavorable budgetary and economic conditions.
    Keywords: Fiscal policy; Fiscal consolidation; Debt ratio; Crisis; DSGE model; Euro Area; Small open economy.
    JEL: E12 E30 E62 H60
    Date: 2015
  2. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–06
  3. By: Timo Bettendorf; Miguel A. Leon-Ledesma
    Abstract: German labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the Euro Area. We investigate this hypothesis quantitatively. We develop an open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for a wage bargaining shock. We then impose these restrictions on a Global VAR consisting of Germany and 8 EMU countries to identify a wage bargaining shock in Germany. Our results show that, although the German current account was significantly affected by wage bargaining shocks, their contribution to European current account imbalances was negligible. We conclude that the reduction in bargaining power of German unions after labor market reforms cannot be the lone driver of European imbalances.
    Keywords: European imbalances; German wage moderation; DSGE; Global VAR; sign restrictions
    JEL: F10 F32 F41
    Date: 2015–06
  4. By: Aurelijus Dabusinskas (Lietuvos Bankas); István Kónya (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University); Stephen Millard (Bank of England, Durham University Business School and Centre for Macroeconomics)
    Abstract: The recent crisis in the Eurozone has led to much discussion about the structure of labour markets in different Eurozone economies. In particular, there has been much talk of the need for structural labour market reform in the Eurozone periphery. But, there are many aspects of labour market structure – eg, wage flexibility, flexibility in hiring and firing, benefits, etc – and it is not clear a priori which aspects really matter. In this paper, we analyse how cross-country differences in labour market characteristics – in particular, wage and employment rigidities – shape the response of different countries to a variety of macroeconomic shocks. To address this question, we use a calibrated small open economy model in which we set the parameters governing the structural characteristics of the labour market based on three European countries: Estonia, Finland and Spain. We found that, given our labour market calibrations, we would expect output and unemployment to be much more adversely affected by the shocks associated with the financial crisis in countries with high unemployment benefit replacement ratios and high job turnover rates.
    Keywords: Labour market structure, Labour market flexibility
    JEL: E24
    Date: 2015–04
  5. By: Enrico Spolaore
    Abstract: This paper discusses the process of European institutional integration from a political-economy perspective, linking the long-standing political debate on the nature of the European project to the recent economic literature on political integration and disintegration. First, we introduce the fundamental trade-off between economies of scale associated with larger political unions and the costs from sharing public goods and policies among more heterogeneous populations, and examine the implications of the trade-off for European integration. Second, we describe the two main political theories of European integration - intergovernmentalism and functionalism - and argue that both theories capture important aspects of European integration, but that neither view provides a complete and realistic interpretation of the process. Finally, we critically discuss the actual process of European institutional integration and its limits, from its beginnings after World War II to the current crisis.
    JEL: F02 F15 F5 H41 H56 H77
    Date: 2015–06
  6. By: Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
    Abstract: The aim of this paper is to study the factors that drive fiscal vulnerability in the European Union countries. For this purpose, we employ a logit model with random effects for a balanced panel comprising of 20 countries and on annual data extracted for 2000-2012. We use as a dependent a dummy variable which takes value of 1 if fiscal policy is assessed as being vulnerable, and 0, otherwise. As explanatories, we use two distinct categories which capture the intrinsic and the exogenous sources of fiscal vulnerability. The results show that higher overall taxation and non-distortionary taxes decrease the likelihood of fiscal policy to be vulnerable, whilst the size of total and of productive government expenditures contribute to an increase in the fiscal vulnerability. Tight fiscal policy has an important contribution to decrease in the fiscal vulnerability. The responsiveness of fiscal policy through discretionary actions also is more likely to reduce fiscal vulnerability than through the automatic response of stabilizers. Improved economic conditions mitigate the risk of one country to become more fiscal vulnerable, whilst large financial sector increase the probability. Tighter control of corruption will lead to a decrease in fiscal vulnerability, while stronger rule of law contributes to growth in fiscal vulnerability.
    Keywords: fiscal policy, vulnerability, automatic stabilizers, discretionary, logit, panel, European Union
    JEL: C23 E62 H12
    Date: 2015–05
  7. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: We analyse German citizens’ knowledge about monetary policy and the European Central Bank (ECB), as well as the public’s use of mass communication media to obtain information about the ECB. We employ a unique representative public opinion survey of German households conducted in 2011. We find that a person’s desire to be informed about the ECB, together with the use of various media channels to keep informed, are decisive for both (i) the person’s perception of how much he or she knows about the ECB and (ii) the person’s actual knowledge. The media-related influence varies by level of education and is stronger for subjective knowledge. Women are significantly less interested in and knowledgeable about the ECB. We conclude that the ECB is not only well advised to continue with education programmes designed to convince the public of the importance of knowing about monetary policy, but to take the gender-specific differences into account in doing so.
    Keywords: ECB, Economic knowledge, Subjective knowledge, Information
    JEL: A20 E52 E58
    Date: 2015
  8. By: Campos, Nauro F; Coricelli, Fabrizio; Moretti, Luigi
    Abstract: This paper investigates whether joint economic and political integration leads to larger economic benefits than just economic integration. The identification strategy rests on the fact that Norway, at the time of the 1995 Enlargement of the European Union (EU), had successfully completed negotiations and fulfilled all accession requirements, taken membership in the European Economic Area (with full access to the Single Market), but decided in a referendum to reject full-fledged EU membership. Using the differences-in-differences and synthetic control methods with regional data, we find substantial politically driven economic benefits from EU membership: if Norway had joined the EU in 1995, productivity levels between 1995 and 2001 would have been 6% higher on average.
    Keywords: European Union; labor productivity; political economy benefits; regional data; synthetic counterfactual method
    JEL: C33 F15 F43 O52
    Date: 2015–06
  9. By: Oliver Denk; Alexandre Cazenave-Lacroutz
    Abstract: The size and composition of assets and liabilities of households differ vastly across the income distribution in euro area countries. This paper shows that differences between income groups in household finance on both sides of the balance sheet contribute to income inequality. The distribution of household credit is two times as unequal and the distribution of stock market wealth four times as unequal as the distribution of household income. Larger credit and stock markets may thus widen income inequality by providing people with high incomes with better investment opportunities and raising the returns on their savings. In addition, financial institutions help people protect their consumption against temporary changes in their income. But they do so unevenly across the distribution, as a household is more likely to be denied credit if it has a low income. No evidence is found of discrimination in credit provision against women or immigrants.<P>Financement des ménages et inégalités de revenu dans la zone euro<BR>La taille et la composition de l’actif et du passif des ménages sont très variables sur la distribution des revenus dans les pays de la zone euro. Ce document montre que les différences entre quintiles de revenu dans le financement des ménages, de part et d’autre du bilan, contribuent aux inégalités de revenu. La distribution du crédit aux ménages est deux fois plus inégale et la distribution du patrimoine boursier quatre fois plus inégale que la distribution des revenus des ménages. L’expansion des marchés du crédit et d’actions pourrait ainsi contribuer aux inégalités de revenu en offrant aux plus hauts revenus de meilleures possibilités d’investissement et une meilleure rentabilité de leur épargne. Par ailleurs, les établissements financiers aident les ménages à protéger leur consommation en période de fluctuations temporaires de leur revenu. Or, ils le font de manière inégale sur la distribution des revenus puisqu’un ménage a plus de risques de se voir opposer un refus si ses revenus sont faibles. Aucun élément ne vient corroborer l’idée d’une discrimination de l’offre de crédit à l’encontre des femmes ou des personnes issues de l’immigration.
    Keywords: income inequality, euro area, immigrants, discrimination, stock market, Women, household credit, wealth inequality, inégalités de richesse, marché boursier, zone Euro, crédit aux ménages, femmes, inégalités de revenu, immigrés, discrimination
    JEL: D14 D63 E21 E51 G2 J16
    Date: 2015–06–17
  10. By: Oliver Denk
    Abstract: Public questioning about the role of finance has been fuelled by the perception that financial sector pay is an important factor behind high economic inequalities. This paper is the first to provide a comprehensive look at the level of earnings in finance and the implications for labour income inequality for European countries. Financial sector workers are shown to make up 19% among the top 1% earners, although the overall employment share of finance is only 4%. Nonetheless, the relatively small size of the sector limits the contribution that financial sector pay has on income inequality to a small, but noticeable amount. Simulations indicate that most of this contribution is explained by financial institutions paying salaries and bonuses which are above what employees with similar profiles get in other sectors. Estimations that allow for heterogeneity across workers reveal that this wage premium is more than twice as high for financial sector workers at the top of the distribution than at the bottom. The labour market in finance displays other symptoms of imperfection, with, for example, male financial sector workers earning a large wage premium over female financial sector workers, again especially at the top.<P>Rémunérations du secteur financier et inégalités des revenus du travail : Données d'observation en Europe<BR>Les interrogations dans l’opinion sur le rôle de la finance se sont nourries du sentiment que les rémunérations dans ce secteur sont un élément important des fortes inégalités économiques. Ce document est le premier à donner une vue d’ensemble du niveau des rémunérations dans la finance et de leurs implications pour les inégalités des revenus du travail dans les pays européens. Il s’avère que les travailleurs du secteur financier constituent 19 % des 1 % de salariés les mieux rémunérés, alors que la part de ce secteur dans l’emploi total n’est que de 4 %. Néanmoins, sa taille relativement modeste fait que son impact sur les inégalités de revenu est réduit, mais visible. Les simulations réalisées montrent que cet impact s’explique essentiellement par les rémunérations et les primes versées par les établissements financiers, supérieures à celles des salariés au profil comparable des autres secteurs. Des estimations qui tiennent compte de l’hétérogénéité entre les travailleurs montrent que cet avantage de salaire du secteur financier est, en haut de la distribution, deux fois plus élevé qu’en bas. Le marché du travail dans la finance révèle d’autres signes d’imperfection, notamment le fait que les travailleurs masculins y bénéficient d’un avantage de salaire conséquent par rapport à leurs homologues femmes, là encore tout particulièrement en haut de la distribution.
    Keywords: income inequality, finance, European Union, Wage premium, gender inequality, earnings, Gini coefficient, wage differential, coefficient de Gini, finance, inégalités de revenu, avantage salarial, surqualification, Inégalités de genre, Union européenne
    JEL: D63 G21 G22 J16 J24 J31
    Date: 2015–06–17
  11. By: Boris Cournède; Oliver Denk
    Abstract: This paper shows that finance has been a key ingredient of long-term economic growth in OECD and G20 countries over the past half-century, but that there can be too much finance. The evidence indicates that at current levels of household and business credit further expansion slows rather than boosts growth. Causality from more credit to slower growth is supported by a novel empirical methodology which exploits changes in financial regulation across countries and time as a source of exogenous variation in financial size. The empirical analyses point to five factors that link more credit to slower growth: i) excessive financial deregulation, ii) a more pronounced increase in credit issuance by banks than other intermediaries, iii) too-big-to-fail guarantees by the public authorities for large financial institutions, iv) a lower quality of credit and v) a disproportionate rise of household compared with business credit. By contrast, expansions in stock market funding in general boost growth.<P>Finance et croissance économique dans les pays de l'OCDE et du G20<BR>Ce document montre que la finance a été une composante essentielle de la croissance économique à long terme dans les pays de l’OCDE et du G20 durant les cinquante dernières années, mais que parfois, il peut y avoir trop de finance. Certaines observations montrent en effet qu’au niveau actuel du crédit aux ménages et aux entreprises, toute nouvelle expansion freine plutôt qu’elle n’accélère la croissance. Des liens de causalité entre l’accroissement de l’offre de crédit et le ralentissement de la croissance sont mis en évidence par une nouvelle méthode empirique, qui utilise les modifications de la réglementation financière dans les pays et dans le temps comme une source de variation exogène de la taille de la finance. L’analyse empirique attire l’attention sur cinq facteurs qui établissent un lien entre l’accroissement de l’offre de crédit et le ralentissement de la croissance : i) une déréglementation financière excessive, ii) une émission de crédit par les banques en progression plus rapide que par les autres intermédiaires, iii) les garanties des pouvoirs publics sur les établissements d’importance systémique (TBTF), iv) une moindre qualité du crédit et v) une augmentation du crédit aux ménages nettement plus forte que celle du crédit aux entreprises. En revanche, l’accroissement du financement par actions en général stimule la croissance.
    Keywords: stock market, guarantees, Too-big-to-fail, equity finance, business credit, bank credit, housing credit, GDP growth, economic growth, debt finance, capital-market credit, marché boursier, crédit bancaire, croissance du PIB
    JEL: G1 G2 G3 O41 O47 O57
    Date: 2015–06–17
  12. By: Fabio Busetti (Bank of Italy); Claire Giordano (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: This paper examines the causes of the exceptionally marked fall in non-construction investment in Italy since 2007. Non-financial private services were the main driver of the decline in the aggregate investment rate, but all sectors weighed in negatively; the reallocation of value added away from industry was a further drag on investment. In concordance with survey findings, an aggregate model of investment indicates that even during the recent double recession the most important driver of capital accumulation was demand conditions. The user cost of capital had a substantial negative impact in the acute phases of the sovereign debt crisis, but since 2013 its contribution has been positive, thanks to the ECB’s expansionary monetary policy. The constraints on capital accumulation imposed by tight credit supply conditions were particularly severe in 2009 and 2012. Finally, uncertainty provided a sizeable drag on investment growth not only during the global financial crisis but also in the last two years. The significance of these determinants of investment is confirmed also by a disaggregated model for the thirteen manufacturing branches.
    Keywords: non-construction investment, uncertainty, credit constraints
    JEL: E22 E27
    Date: 2015–06
  13. By: Mateo Tomé, Juan Pablo (Kingston University London)
    Abstract: The object of study is the dynamic of capital accumulation in Spain between 1999 and 2012, a period in which the Spanish economy has had first a system of fixed exchange rates, and then monetary integration within the Eurozone. Investment has been largely driven by the revaluation of assets related to construction (mainly residential), which has generated a profound reshaping of the economic structure. The relationship between investment, productivity and costs is first approached from a macroeconomic perspective, followed with an analysis of the composition by assets and sectors. It is shown that the most dynamic sectors have been those with relative low technical composition of capital, leading to absolute declines in labour productivity, as well as a price-effect that has completely distorted the reproduction of the Spanish economy.
    Keywords: capital accumulation; growth; productivity; investment
    JEL: E11 E22 O33 O40
    Date: 2015–06–11
  14. By: Giacomo Sbrana (NEOMA Business School); Andrea Silvestrini (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Forecasting inflation is an important and challenging task. In this paper we assume that the core inflation components evolve as a multivariate local level process. This model, which is theoretically attractive for modelling inflation dynamics, has been used only to a limited extent to date owing to computational complications with the conventional multivariate maximum likelihood estimator, especially when the system is large. We propose the use of a method called “Moments Estimation Through Aggregation” (M.E.T.A.), which reduces computational costs significantly and delivers prompt and accurate parameter estimates, as we show in a Monte Carlo exercise. In an application to euro-area inflation we find that our forecasts compare well with those generated by alternative univariate constant and time-varying parameter models as well as with those of professional forecasters and vector autoregressions.
    Keywords: inflation, forecasting, aggregation, state space models
    JEL: C32 C53 E31 E37
    Date: 2015–06

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