nep-eec New Economics Papers
on European Economics
Issue of 2016‒04‒04
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach By Potjagailo, Galina
  2. The sovereign debt crisis in Europe: impacts on prices, stability, growth and perspectives for public debt sustainability By Angelo Federico Arcelli, PhD; Frank Sensenbrenner
  3. Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU By Esposito, Piero; Messori, Marcello
  4. Recession, austerity and gender - a comparison of eight european labour markets By Hélène Perivier;
  5. Effectiveness of Monetary Policy in the Euro Area: The Role of US Economic Policy Uncertainty By Mehmet Balcilar; Riza Demirer; Rangan Gupta; Reneé van Eyden
  6. Exit Risks and Contagion in the Euro Area By Canofari, Paolo; Messori, Marcello
  7. Dating Systemic Financial Stress Episodes in the EU Countries By Thibaut Duprey; Benjamin Klaus; Tuomas Peltonen
  8. Hiring incentives and/or firing cost reduction? Evaluating the impact of the 2015 policies on the Italian labour market By Paolo Sestito; Eliana Viviano
  9. How have EU's Trade Agreements Impacted Consumers? By Holger Breinlich; Swati Dhingra; Gianmarco Ottaviano
  10. Assessing financial stability risks from the real estate market in Italy By Federica Ciocchetta; Wanda Cornacchia; Roberto Felici; Michele Loberto
  11. What Has Been Happening to UK Income Inequality Since the Mid-1990s? Answers from Reconciled and Combined Household Survey and Tax Return Data By Richard V. Burkhauser; Nicolas Hérault; Stephen P. Jenkins; Roger Wilkins
  12. Oil price pass-through along the price chain in the euro area By Castro, César; Jiménez-Rodríguez, Rebeca
  13. Structural Reform in Germany By Krebs, Tom; Scheffel, Martin
  14. Is European Entrepreneurship in Crisis? By Naudé, Wim
  15. Inheritance Flows in Switzerland, 1911-2011 By Marius Brulhart; Didier Dupertuis; Elodie Moreau

  1. By: Potjagailo, Galina
    Abstract: I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries.
    Keywords: monetary policy,Euro area,Central and Eastern Europe,exchange rate regime,financial transmission,FAVAR
    JEL: C33 E52 E58 F42
    Date: 2016
  2. By: Angelo Federico Arcelli, PhD (CTR SAIS Johns Hopkins); Frank Sensenbrenner (SAIS Johns Hopkins)
    Abstract: The solution to the sovereign debt crisis and the restoration of confidence in the European project are critical for the long term stability and economic growth of the region, and for the stability of worldwide financial market. Defining debt sustainability is not an easy task. In the past, economic theory has suggested different proposals. European Union member countries decided to opt into a specific level of Public Debt to GDP ratio (60%) by signing the Maastricht Treaty and the Growth and Stability Pact. Public debt sustainability during the core of the financial crisis (2008-2010) became under stress. The heritage of such period is very different in the Eurozone, leaving weaker countries more exposed and Italy, in particular, given its large public debt, with very reduced margin for manoeuvre. What is now happening in Europe seem to be the response of a long path of uncertain developments and the return to a more focused planning on a long term financially stable union. In November 2014 the Single Supervisory mechanism (SSM) will be in place, allowing ECB to take over supervision responsibilities on the bulk of Eurozone banks (around 85% of the total assets as an aggregate). This step, followed by the developing of a Single Resolution Mechanism (SRM) in 2015 will allow Eurozone to have a fully fledged Central Bank. Will all this be enough to stabilize the Eurozone and revamp the path of European Union in the long term? The answer will come only from future event, but, nevertheless, it is sure that financial stability in a large area as Eurozone will require again a renewed path to convergence for national economies and a globally stable and ordered situation of public accounts. This may imply the need of further significant structural reforms and, possibly, a political agreement on the long term shape of the Union.
    Keywords: Convergence, Economic Growth, Globalization, Growth, US, EU.
    Date: 2015–01
  3. By: Esposito, Piero (LUISS School of European Political Economy); Messori, Marcello (LUISS School of European Political Economy)
    Abstract: One of the main problems facing the European Monetary Union is the macroeconomic imbalances between ‘core’ and ‘peripheral’ member states. Though they predated the union’s creation, these problems were highlighted between 1999 and the advent of the international financial crisis. One significant indicator of these imbalances is the often divergent trade and current account disequilibria of these two groups of countries. With the events of 2007-08 and the subsequent ‘flight to quality’ of financial capital, the current account deficits of ‘peripheral’ member states became unbearable. By the end of 2014, all ‘peripheral’ countries had eliminated or drastically reduced their deficits. We show that this result is more dependent on the contraction of their GDP and relative reduction in their average real wages than on a productivity increase in their economy. To reach this conclusion, the paper empirically describes the determinants of the structural evolution in trade and current account imbalances and then offers econometric evidence of the impact of different components of unit labor cost on net exports. Based on this evidence, the paper points out the fragility of the European adjustments and suggests some policy implications.
    Keywords: imbalances; disequilibria; euro area; competitiveness; productivity; labor; economic policy; monetary union
    JEL: F15 F16 F36 O52
    Date: 2016–03–15
  4. By: Hélène Perivier (OFCE Sciences Po);
    Abstract: The GDP collapse phase of the economic crisis has less affected female employment than male employment, whereas the austerity phase was particularly harsh for women. This gendered impact of the different stages of the crisis is described in the literature as follows: from she-cession to sh(e)austerity . This article aims to analyse the gendered trends in labour market for eight European countries. The quarterly evolution of the participation of women and men and the employment at the sectorial level are decomposed. The she-cession to sh(e)austerity scenario does not apply to all the selected countries. The other channels through which austerity policies can jeopardize gender equality and women’s rights are identified by referring to a typology of these policies.
    Keywords: gender,Recession,Austerity,Segregation, Economic policies, Employment
    JEL: J16 J21 J22
    Date: 2016–02
  5. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; IPAG Business School, France); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, USA.); Rangan Gupta (Department of Economics, University of Pretoria); Reneé van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper examines the role of U.S. economic policy uncertainty on the effectiveness of monetary policy in the Euro area. Using a structural Interacted Vector Autoregressive (IVAR) model conditional on high and low levels of U.S. economic policy uncertainty, we find that uncertainty regarding policy changes in the U.S. dampens the effect of monetary policy shocks in the Euro area, with both price and output reacting more significantly to monetary policy shocks when the level of U.S. policy uncertainty is low. We argue that the U.S. government’s actions regarding policy changes in the U.S. is a source of uncertainty for Euro area investors and high levels of policy uncertainty that spill over from the U.S. drive Euro area investors to adopt a wait-and-see approach, leading to a relatively weaker (and sometimes insignificant) response of price and output to monetary tightening in the Euro area. The findings underscore the importance of market integration and coordination of economic policy changes on the effectiveness of monetary policy on the macroeconomy on both sides of the Atlantic. Our results thus, provide evidence in favour of the policy ineffectiveness hypothesis in the Euro area contingent on the economic policy uncertainty of the U.S.
    Keywords: Economic Policy Uncertainty, Monetary Policy, Interacted Structural Vector Autoregressive Model
    JEL: C32 C51 C54 E30 E31 E32 E52
    Date: 2016–03
  6. By: Canofari, Paolo (LUISS School of European Political Economy); Messori, Marcello (LUISS School of European Political Economy)
    Abstract: This paper aims to assess the possible impact that the depreciation of a common currency can have on the stability of the related monetary union. It shows that, other things being equal, this depreciation reduces the probability of the weakest Member States leaving the monetary union when hit by a specific and negative demand shock, and the probability of other Member States, which belong to the same area but are not directly hit by any shock, deciding to leave due to the contagion effect. Obviously, the depreciation of the common currency is not the only variable affecting the stability of a monetary area. In this respect, it is sufficient to recall that competition in the international markets is not just price competition. Hence, the paper also analyzes the role played by trade balance elasticities. In our framework, it emerges that higher (lower) elasticities of the weakest countries hit by the specific shock make their exit more (less) likely. Moreover, given the elasticities of these same countries, there is a threshold value in the elasticities of the other Member States under which contagion can never happen. It is apparent that this framework applies to the possible behavior of ‘peripheral’ countries in the European Economic and Monetary Union (EMU), and to their interactions with the rest of the area. Hence, this paper can be read as a strategic interaction between two representative countries of the euro area in order to identify the selection mechanisms between good and bad equilibria.
    Keywords: Euro breakup; currency crisis; contagion; Nash equilibria
    JEL: F30 F31 F41 G01
    Date: 2016–11–05
  7. By: Thibaut Duprey; Benjamin Klaus; Tuomas Peltonen
    Abstract: This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index. Based on a Markov-switching model, high financial stress regimes are identified, and a simple algorithm is used to select those episodes of financial stress that are associated with a substantial negative impact on the real economy. By applying this framework to 27 European Union countries, the paper is a first attempt to provide a chronology of systemic financial stress episodes in addition to the expert-detected events that are currently available.
    Keywords: Business fluctuations and cycles, Central bank research, Econometric and statistical methods, Economic models, Financial markets, Financial stability, Financial system regulation and policies, Monetary and financial indicators
    JEL: C54 G01 G15
    Date: 2016
  8. By: Paolo Sestito (Bank of Italy); Eliana Viviano (Bank of Italy)
    Abstract: In 2015 Italy adopted two different policies aimed at reducing labour market dualism and fostering employment: a generous permanent hiring subsidy and new regulations lowering firing costs and making them less uncertain. Using microdata for Veneto and exploiting some differences in the design of the policies, we evaluate the impact of each measure. Both contributed to double the monthly rate of conversion of fixed-term jobs into permanent positions. Moreover, around 40 per cent of new total gross hires with permanent job contracts occurred because of the incentives, whereas 5 per cent can be attributed to the new firing regulations . The new firing rules also made firms less reluctant to offer permanent job positions to yet untested workers. The possibility of benefitting from the incentives in case of a conversion also boosted temporary hiring, as it allowed firms to test for the quality of a job match.
    Keywords: job creation, firing costs, hiring incentives, labour market reforms
    JEL: J6 J21
    Date: 2016–03
  9. By: Holger Breinlich; Swati Dhingra; Gianmarco Ottaviano
    Abstract: Over the past two decades, the European Commission has negotiated a number of Free Trade Agreements (FTAs) which contain both traditional elements of bilateral tariff reductions, as well as additional liberalisation measures like non-tariff barriers. According to economic theory, FTAs lower trade barriers on imported goods, leading to consumer welfare gains from increase in product variety, better quality products and lower prices for existing products. We estimate the variety, quality and price effects of EU FTAs, drawing on recent developments in the quality literature and using detailed import price and expenditure data. On average, trade agreements the EU has entered into over the past two decades increased the quality of UK imports from its FTA partners by 26 per cent and lowered the quality-adjusted price of imports by 19 per cent. We find that consumer prices fell by 0.5 per cent for UK consumers as a result of FTAs with trade partners that are not members of the European Community. Price reductions for UK consumers are greater than those for EU12 consumers, whose prices fell by 0.3 per cent from non-EC FTAs. Using the set of non-EC FTA estimates to predict the effects of future FTAs, we find a projected decline in consumer prices for UK consumers of 0.4 per cent from an FTA with the United States (TTIP) and 0.2 per cent an FTA with Japan (EPA). For EU12 consumers, the TTIP and EPA are predicted to reduce consumer prices by 0.3 per cent and 0.1 per cent.
    Keywords: trade agreements, EU, consumers
    Date: 2016–03
  10. By: Federica Ciocchetta (Bank f Italy); Wanda Cornacchia (Bank f Italy); Roberto Felici (Bank f Italy); Michele Loberto (Bank f Italy)
    Abstract: We provide an analytical framework for assessing financial stability risks arising from the real estate sector in Italy. This framework consists of two blocks: three complementary early warning models (EWMs) and a broad set of indicators related to the real estate market, to credit and to households. We focus separately on households and on firms engaged in construction, management and investment services in the real estate sector. Since in Italy there have been no real estate-related systemic banking crises, as vulnerability indicator we consider a continuous indicator represented by the ratio between the annual flow of bad debts related to the real estate sector and banks’ capital and reserves. We contribute to the recent literature on EWMs by implementing a Bayesian Model Averaging (BMA) based on linear regression models with a continuous dependent variable of vulnerability and an ordered logit model with a discrete dependent variable of vulnerability classes. Both models exhibit good predictive abilities. Based on the BMA projections for the period from the third quarter of 2015 to the second quarter of 2016, banking vulnerability related to the real estate sector is expected to gradually decline.
    Keywords: real estate markets, early warning models, bayesian model averaging, banking crises, macroprudential policy
    JEL: C35 C52 E44 E58 G21 G28
    Date: 2016–03
  11. By: Richard V. Burkhauser (Department of Policy Analysis and Management, Cornell University); Nicolas Hérault (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Stephen P. Jenkins (Department ofSocial Policy, London School of Economics); Roger Wilkins (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: Estimates of UK income inequality trends differ substantially according to whether estimates are based on household survey data (used for official statistics) or tax return data (used in the top incomes literature). We reconcile differences in variable definitions and combine survey and tax return data in order to take advantage of the much better coverage of top incomes in the latter, and provide improved estimates of UK inequality trends since the mid-1990s. We show there was a marked increase in income inequality in the early 2000s that survey-based estimates do not reveal, and our conclusions are robust to changes in the definitions of income, income-sharing unit, and summary inequality measure. In addition, our reconciled and combined data provide more comparable estimates of UK-US inequality trends than the top incomes literature to date. Classification-D31, C81
    Keywords: Inequality, income inequality, top income shares, HBAI, SPI, top incomes, tax return data, survey data
    Date: 2016–02
  12. By: Castro, César; Jiménez-Rodríguez, Rebeca
    Abstract: This paper analyzes how oil price shocks are transmitted downstream to producer and consumer prices in the euro area at the highest disaggregate level. In doing so, we first generate an appropriate database that identifies each industrial production sector with its corresponding price of consumer goods for the euro area. We next estimate a constrained vector autoregressive model. Our findings show a statistically significant increase in producer prices after an oil price shock for branches with high oil consumptions, although this statistical pass-through is only partial. However, there is no evidence of a significant oil price pass-through to consumer prices for most branches, which suggests the adaptability of European producers from the most branches to higher oil price pressures without transmitting them to consumers (exceptions: mining, chemical and metal).
    Keywords: Oil price; Industrial prices; Consumer prices; Disaggregation
    JEL: E31 Q4
    Date: 2016–03–22
  13. By: Krebs, Tom (University of Mannheim); Scheffel, Martin (University of Cologne)
    Abstract: This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional service sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the small size of the professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short-run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term fiscal surpluses is positive for any interest (discount) rate less than 9 percent.
    Keywords: structural reform, Germany
    JEL: E24 E60 J2 J3
    Date: 2016–03
  14. By: Naudé, Wim (Maastricht University)
    Abstract: The European Commission has adopted an Entrepreneurship 2020 Action Plan as its answer to challenges brought by the gravest economic crisis in the last 50 years. Governments of European countries all habour high expectations that entrepreneurship will contribute towards ending the continent's economic malaise. In this article I argue that these expectations may be disappointed because (i) entrepreneurship promotion is a last-resort policy, (ii) entrepreneurs are being overestimated, and (iii) entrepreneurs are too often allowed to capture policy. These reasons are indicative that that in addition to its euro and refugee crises, Europe is suffering from an entrepreneurship crisis. Entrepreneurs are increasingly older and are faring less well in terms of earnings compared to wage earners. Small businesses are not creating sufficient jobs, they are not raising labour productivity, and immigrant-entrepreneurs are not productively assimilated. Big businesses are largely a legacy of the past, and resorting more and more to lobbying. When they innovate it is often to replace labour. Hence, given that Europe faces rising unemployment, growing numbers of unassimilated migrants, and more pensioners - and all in the face of stagnating productivity growth - the conclusion is that entrepreneurs have failed to reduce the dependency burden on those who do work. This puts immense strain on European public finances that are already fragile after the financial crisis. Demographic changes and institutional shortcomings are thus at the core of the entrepreneurship crisis in Europe.
    Keywords: entrepreneurship, Europe, development
    JEL: L53 M13 O52
    Date: 2016–03
  15. By: Marius Brulhart; Didier Dupertuis; Elodie Moreau
    Abstract: We estimate the size of inheritance flows in Switzerland as a share of total wealth and of national income over a long span of data, in close analogy to the study for France by Piketty (2011). We find that inheritance flows had been growing more slowly than national income up until the 1970s, but have been outpacing income growth since. According to our central estimates, the annual flow of inheritance amounted to 2.7% of the stock of private wealth and to 13.1% of national income in 2011. These values are higher than our corresponding (though more approximate) estimates for 1911. The share of total wealth that is attributable to inheritance has remained relatively stable over time, uctuating between 40% and 50%.
    Keywords: inheritance, Switzerland
    JEL: D31 H24 N34
    Date: 2016–03

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