nep-eec New Economics Papers
on European Economics
Issue of 2016‒02‒29
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates By Mirdala, Rajmund
  2. Is fiscal consolidation self-defeating? A Panel-VAR analysis for the Euro area countries By Attinasi, Maria Grazia; Metelli, Luca
  3. Output and unemployment, Portugal, 2008–2012 By José R. Maria
  4. Model pooling and changes in the informational content of predictors: An empirical investigation for the euro area By Schwarzmüller, Tim
  5. Does Lack of Financial Stability Impair the Transmission of Monetary Policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  6. Output gaps, inflation and financial cycles in the United Kingdom By Melolinna, Marko; Tóth, Máté
  7. Determinants of Co-movement and of Lead and Lag Behavior of Business Cycles in the Eurozone By Hasan Engin Duran; Alexandra Ferreira-Lopes
  8. The New Deal with the United Kingdom: the Downside of Flexibility By Phedon Nicolaides; Roxana Nedelescu (née Sandu); Joanna Hornik; Gibran Watfe
  9. Fiscal competition and public debt By Janeba, Eckhard; Todtenhaupt, Maximilian
  10. The geography of the economic crisis in Europe: national macroeconomic conditions, regional structural factors and short-term economic performance. By Riccardo Crescenzi; Davide Luca; Simona Milio
  11. Financial Stability Paper 33: A European Capital Markets Union: implications for growth and stability By Anderson, Nicola; Brooke, Martin; Hume, Michael; Kürtösiová, Miriam
  12. Internet and taxation in European Union By Bernardi, Luigi
  13. The German unemployment since the Hartz reforms: Permanent or transitory fall? By Gaëtan Stephan; Julien Lecumberry
  14. The National Wealth of Sweden, 1810–2014 By Waldenström, Daniel
  15. On the roles of different foreign currencies in European bank lending By Krogstrup, Signe; Tille, Cédric

  1. By: Mirdala, Rajmund
    Abstract: Quantitative easing conducted by European central bank to fight persisting risks of deflation is drawing an attention of increasing number of empirical studies. Moreover, effectiveness of monetary policy at near zero inflation rates reveals lot of issues on whether interest rates really have a lower bound around zero percent. As a result, traditional views on the role of inflation expectations and expected real interest rates in the long-term interest rates determination face the challenge of fundamental revision. In the paper we analyze relative contributions of inflation expectations and expected real interest rates to long-term interest rates on government bonds leading path as well as their responses to both types of shocks in the Euro Area member countries using SVAR methodology. We also decompose long-term interest rates into transitory and permanent components. Our research revealed considerable differences in the role of inflation expectations and expected real interest rates shocks in determining long-term interest rates between core and periphery countries of the Euro Area. The crisis period even intensified this trend.
    Keywords: interest rates, inflation expectations, economic crisis, SVAR, variance decomposition, impulse-response function
    JEL: C32 E43 F41
    Date: 2015–09
  2. By: Attinasi, Maria Grazia; Metelli, Luca
    Abstract: This paper studies the effects of fiscal consolidation on the debt-to-GDP ratio of 11 Euro area countries. Using a quarterly fiscal Panel VAR allows us to trace out the dynamics of the debt-to-GDP ratio following a fiscal shock and to disentangle the main channels through which fiscal consolidation affects the debt ratio. We define a fiscal consolidation episode as self-defeating if the debt-to-GDP ratio does not decrease compared to the pre-shock level. Our main finding is that when consolidation is implemented via a cut in government primary spending, the debt ratio, after an initial increase, falls to below its pre-shock level. When instead the consolidation is implemented via an increase in government revenues, the initial increase in the debt ratio is stronger and, eventually, the debt ratio reverts to its pre-shock level, resulting in what we call self-defeating austerity. JEL Classification: E62, H6, C33
    Keywords: debt trajectory, fiscal consolidation, fiscal stress, panel VAR
    Date: 2016–02
  3. By: José R. Maria
    Abstract: The Portuguese economy experienced a dramatic 2008–2012 period. Gross Domestic Product fell around 10%, while the unemployment rate jumped 8 percentage points, reaching almost 17% by 2012Q4. A semi-structural model with rational expectations—named, for ease of reference, Model Q—largely assigns such developments to “non-cyclical disturbances” in product and labour markets. The economy was also severely hit by two recessive periods in the euro area, and to a lesser extent by abnormally high risk premia. Model Q embodies a relatively robust Okun’s law, but not without important revisions in trend components. Recursive estimates over 2008-2012 include a decrease in the longrun real interest rate, shared by both Portugal and the euro area, as well as a decrease in the long-run growth rate of the trend component of output, mirrored by an increase in long-run unemployment, which raises “secular stagnation” concerns. ModelQ fits the characteristics of a small economy integrated in the credible monetary union, and is parametrized with Bayesian techniques.
    JEL: C51 E32 E52
    Date: 2016
  4. By: Schwarzmüller, Tim
    Abstract: I study the performance of single predictor bridge equation models as well as a wide range of model selection and pooling techniques, including Mallows model averaging and Cross-Validation model averaging, for short-term forecasting euro area GDP growth. I explore to what extend model selection and model pooling techniques are able to outperform a simple autoregressive benchmark model in the periods before, during and after the Great Recession. I find that single predictor bridge equation models suffer a great variation in the forecast performance relative to the benchmark model over the analysed sub-samples. Moreover, model selection techniques turn out to produce quite poor forecasts in some sub-samples. On the contrary, model pooling based on the Cross-Validation and the Mallows criterion provide a very stable and accurate forecast performance.
    Keywords: short-term forecasting,Great Recession,mixed frequency data,model selection and model pooling
    JEL: C53 E37
    Date: 2015
  5. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.
    Keywords: Central Bank Liquidity, Corporate Deposits, ECB, Financial Crisis, Loans
    JEL: E43 E58 G01 G21
    Date: 2015–06
  6. By: Melolinna, Marko (Bank of England); Tóth, Máté (European Central Bank)
    Abstract: This paper aims at constructing potential output and output gap measures for the United Kingdom which are pinned down by macroeconomic relationships as well as financial indicators. The exercise is based on a parsimonious unobserved components model which is estimated via Bayesian methods where the time-paths of unobserved variables are extracted with the Kalman filter. The resulting measures track current narratives on macroeconomic cycles and trends in the United Kingdom reasonably well. The inclusion of summary indicators of financial conditions leads to a more optimistic view on the path of UK potential output after the crisis and adds value to the model via improving its real-time performance. The models augmented with financial conditions have some inflation forecasting ability over the monetary policy relevant two to three-year horizon during the last fifteen years, although this ability diminishes in a real-time setting. Finally, we also introduce a new approach to constructing financial conditions indices, with emphasis on their real-time performance and ability to track the evolution of macrofinancial imbalances. Our results can be relevant from both monetary and macroprudential policy perspectives.
    Keywords: Bayesian estimation; business cycle; forecasting; financial conditions; real-time data; unobserved components model.
    JEL: C11 C32 E31 E32 E52
    Date: 2016–02–12
  7. By: Hasan Engin Duran; Alexandra Ferreira-Lopes
    Abstract: : In this paper we study business cycle correlations in the Eurozone, and its determinants. Additionally, we also analyze the determinants of the lead and lag behavior of business cycles in the Eurozone. We explore the relevance, in the Eurozone context, of the determinants of business cycle synchronization identified in the literature, namely bilateral trade intensity, dissimilarity of labor market rigidity, net external migration, dissimilarity in industrial structures, financial openness, and FDI relations. We estimate a simultaneous 4-equations model by OLS and 3SLS to investigate empirically the above mentioned determinants of business cycle correlation. Bilateral trade relations present a positive influence on business cycle correlations, while the dissimilarity of labor market rigidity presents a negative influence. The rest of the above mentioned variables are non-significant. In what concerns the determinants of the lead and lag behavior results show that the member states of the Eurozone that usually lead the cycle are the ones that are wealthier, with strict employment legislation, more specialized in construction and finance sectors, and more prone to international capital movements.
    Keywords: Bilateral Business Cycles Correlations, Lead and Lag Behavior of Business Cycles, Labor Market Flexibility, External Migration
    JEL: C3 E32 F15 F21 F22 F44
    Date: 2015–04–15
  8. By: Phedon Nicolaides (Director of Studies and Jan Tinbergen Chair, Department of European Economic Studies, College of Europe); Roxana Nedelescu (née Sandu) (College of Europe, Department of European Economic Studies); Joanna Hornik (College of Europe, Department of European Economic Studies); Gibran Watfe (College of Europe, Department of European Economic Studies)
    Abstract: This paper examines the proposals listed by the President of the European Council, Donald Tusk, in response to the letter sent by the British Prime Minister, David Cameron, asking for a fresh settlement concerning the United Kingdom’s relationship with the European Union. The paper reviews the nature and possible consequences of the “substantial changes” that were demanded in the areas of economic governance, competitiveness, sovereignty, and immigration.
    Keywords: O11, F02, E61, H50.
    Date: 2016–02
  9. By: Janeba, Eckhard; Todtenhaupt, Maximilian
    Abstract: The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of governments which differ in their initial debt levels.
    Keywords: Asymmetric Tax Competition,Business Tax,Sovereign Debt,Inter-Jurisdictional Tax Competition
    JEL: H25 H63 H73 H87
    Date: 2016
  10. By: Riccardo Crescenzi; Davide Luca; Simona Milio
    Abstract: This paper explores the linkages between pre-2008 crisis national macro-economic conditions, regional resistance factors and depth of the crisis in the regions of the EU27. The results suggest that only a limited set of macro-economic factors shape the regional reaction to the crisis. A healthy current account surplus is associated with stronger economic performance during the post-2008 recession. Conversely, high public debt countries are more successful in sheltering their regional economies in the short-run. When looking at regional-level resistance, human capital is the single most important positive factor. Conversely, research and development-intensive regions are more exposed to negative shocks.
    Keywords: economic crisis; crisis consequences; European Union; regional resistance; spatial heterogeneity.
    JEL: E32 O52 P48 R11
    Date: 2016–01–11
  11. By: Anderson, Nicola (Bank of England); Brooke, Martin (Bank of England); Hume, Michael (Bank of England); Kürtösiová, Miriam (Bank of England)
    Abstract: Capital Markets Union (CMU) is an overarching term used to describe a number of possible measures aimed at diversifying and integrating European capital markets to support economic growth and stability. This paper examines the mechanisms through which CMU could help to achieve these objectives, namely better matching of savers and borrowers and improved private-sector risk sharing, and identifies potential reform areas. In doing so, it gives consideration to the implications of greater financial diversification and integration for financial stability. The paper concludes that CMU proposals will need to be targeted at both savers and borrowers and that economic and financial stability will be better served if funds are directed towards investments less prone to capital flight during stress, including equities.
    Keywords: financial regulations; capital markets union
    JEL: F33 F36 G28
    Date: 2015–02–27
  12. By: Bernardi, Luigi
    Abstract: The purpose of this paper is to offer a primer on certain important features and issues concerning Internet and taxation in the European Union. After a general introduction concerning the origins of the matter, the paper discusses why a tax on the huge profits made by the big US digital MNEs in Europe was not substantially reflected in the tax policy of EU members, notwithstanding the large tax gap among EU countries resulting from the shift in profits by the (US digital) MNE towards lower or no taxation countries. Then the main directives on Internet and taxation introduced by the EU (and also by the OECD) since the late 1990s are discussed: the EU especially focusses on establishing the due place of taxation on electronic commerce, while the OECD (more recently together with the G20) has placed the emphasis on regulating Transfer Prices and contrasting Base Erosion and Profits’ Shifting (BEPS).
    Keywords: Web Tax; E-commerce; Profits shifting, Europe; OECD
    JEL: H20 H29
    Date: 2015–06–21
  13. By: Gaëtan Stephan (CREM - Centre de Recherche en Economie et Management - CNRS - Centre National de la Recherche Scientifique - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Julien Lecumberry (CREM - Centre de Recherche en Economie et Management - CNRS - Centre National de la Recherche Scientifique - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1)
    Abstract: The Hartz reforms were designed to make the German labor market more flexible in order to reverse the increasing trend of unemployment. This paper employs unobserved components models in order to distinguish permanent from transitory movements in the German unemployment rate. Our results show that the permanent component of the German unemployment was reduced in the range of 1.1 and 2.6 percentage points after the Hartz reforms.
    Keywords: business cycle,unobserved components,Hartz reforms
    Date: 2015–11
  14. By: Waldenström, Daniel (Department of Economics)
    Abstract: This study presents a new database, the Swedish National Wealth Database (SNWD), which contains annual data on private, public and national wealth and sectoral saving rates in Sweden over the past two centuries. The paper reviews previous investigations of national wealth, compares their estimates with the new ones and discusses method approaches and measurement problems. Then the main data series are presented for assets and liabilities and their subcomponents, for the private and public do-mestic and foreign sectors. Complementing the traditional focus on economic flow variables in the past literature on long-run economic developments, this new database offers potentially new perspec-tives of a number of important issues in the modern economic history of Sweden.
    Keywords: National wealth; Household portfolios; Saving; Pension wealth; Economic history
    JEL: E21 H31 N33 N34
    Date: 2015–09–11
  15. By: Krogstrup, Signe; Tille, Cédric
    Abstract: We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Lending in other currencies is more used in lending to resident nonfinancial firms, and mostly in cross-border lending, where it is sensitive to funding costs and trade. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. Our analysis shows that not all foreign currencies are alike, and that any policy aimed at the use of foreign currencies needs to take this heterogeneity into account.
    Keywords: Swiss franc lending,foreign currency lending,cross-border transmission of shocks,European bank balance sheets
    JEL: F32 F35 F36
    Date: 2015

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