nep-eec New Economics Papers
on European Economics
Issue of 2016‒05‒21
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Correcting External Imbalances in the European Economy By Doris Hanzl-Weiss; Michael Landesmann
  2. Soft budget constraints, European Central Banking and the financial crisis By Jannik, Jäger; Grigoriadis, Theocharis
  3. Sovereign CDS Spread Determinants and Spill-Over Effects By Spyros Spyrou; Emilios Galariotis; Panagiota Makrichoriti
  4. Financial stress transmission in EMU sovereign bond market volatility: A connectedness analysis By Fernando Fernández-Rodríguez; Marta Gómez-Puig; Simón Sosvilla-Rivero
  5. A proposal to revive the European Fiscal Framework By Grégory Claeys; Zsolt Darvas; Alvaro Leandro
  6. The pre-Great Recession slowdown in productivity By Cette, Gilbert; Fernald, John G.; Mojon, Benoit
  7. Heterogeneity in euro-area monetary policy transmission: Results from a large multi-country BVAR model By Mandler, Martin; Scharnagl, Michael; Volz, Ute
  8. Macroeconomic and Financial Effects of Oil Price Shocks: Evidence for the Euro Area By Claudio Morana
  9. Disentangling the Monetary Policy Stance By Filippo Gori
  10. International dynamics of inflation expectations By Aleksei Netšunajev; Lars Winkelmann; ;
  11. Structural Reform in Germany By Tom Krebs; Martin Scheffel
  12. Growing like Spain: 1995-2007 By Manuel García-Santana; Josep Pijoan-Mas; Enrique Moral-Benito; Roberto Ramos
  13. From Bismarck to Beveridge: the Other Pension Reform in Spain By José Ignacio Conde-Ruiz; Clara I. González
  14. Potential Output and Fiscal Rules in a Monetary Union under Asymmetric Information – 2nd ed By L. Marattin; S. Meraglia
  15. Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe By Ananya Kotia; Victor Duarte Lledo
  16. The Post-Crisis Slump By Kollmann, Robert; Leeper, Eric; Roeger, Werner
  17. Structural and cyclical factors of Greece’s current account balances: a note By Ioanna C. Bardakas
  18. What Determines Top Income Shares? The Role of the Interactions between Financial Integration and Tax Policy By Thibault Darcillon
  19. Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden By Jiaqian Chen; Francesco Columba

  1. By: Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary This paper examines current account developments in different country groups amongst the lower- and medium-income European economies (LMIEs) both prior to the crisis and following it. The Baltic countries, the Western Balkan as well as the Southern EU countries (Greece, Portugal and Spain) showed rather dramatic deteriorations in their current accounts prior to the outbreak of the financial crisis in 2008/2009, while in the Central and Eastern European countries current account deficits never exploded. What drove current account developments before the crisis and have external imbalances been sustainably corrected? We investigate whether and to which extent adjustments took place in terms of trade performance, real effective exchange rates and components of unit labour costs. Finally, we look at developments of the tradable and non-tradable sectors of the economy and find that ‘structural’ current account problems are grounded in persistent weaknesses of the tradable sector. As such, policy implications would entail that countries which suffer from longer-term ‘structural’ external imbalances have to strongly focus their policy attention on a recovery of the tradable sector.
    Keywords: trade and current account imbalances, real effective exchange rates, unit labour costs, structural developments, tradable sector, non-tradable sector, lower- and medium-income European economies (LMIEs), Central and Eastern European countries, Western Balkan countries, Southern EU countries
    JEL: O10 F14 J3
    Date: 2016–04
  2. By: Jannik, Jäger; Grigoriadis, Theocharis
    Abstract: During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these unconventional monetary policy measures created soft budget constraints for the Eurozone countries by lowering their bond yield spreads. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). We find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. The results are confirmed by robustness checks that directly estimate the effect of unconventional monetary policy on central government debt.
    Keywords: soft budget constraints,bond yield spreads,monetary policy events,securities markets programme,European Central Bank
    JEL: F34 F37 F42 P17 P51
    Date: 2016
  3. By: Spyros Spyrou (Athens University of Economics and Business); Emilios Galariotis (Audencia Nantes School of Management,); Panagiota Makrichoriti (Athens University of Economics and Business)
    Abstract: This paper examines the determinants of CDS spreads and potential spillover effects for Eurozone countries during the recent financial crisis in the EU. We employ a Panel Vector Autoregressive (PVAR) model which combines the advantages of traditional VAR modelling with the advantages of a panel-data approach. In addition to variables that proxy for global and financial market spread determinants we also employ variables that proxy for behavioral determinants. We find that the determinants of CDS variance are neither uniform nor stable during different periods and different countries. For instance, as we move from 2008 to 2014 the impact of the slope of the term structure on CDS spread variance is increasing for Spain, Portugal, Italy, Greece, Ireland, and decreasing for Germany, France, Netherlands, Belgium and Austria. Other findings indicate that investor sentiment may be an important CDS spread determinant during the period between 2008 and 2010, along with other factors, while spillover effects may run from Spain and Italy to core countries while spillover effects from Portugal, Greece, and Ireland are of minor importance.
    Keywords: Financial Crisis, CDS, Spreads, Panel VAR, Sentiment
    JEL: G12 G15
  4. By: Fernando Fernández-Rodríguez (Department of Quantitative Methods in Economics, Universidad de Las Palmas de Gran Canaria, 35017 Las Palmas de Gran Canaria, Spain.); Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona. 08034 Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute of International Studies Department of Quantitative Economics, Universidad Complutense de Madrid.)
    Abstract: This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.
    Keywords: Sovereign debt crisis; Euro area; Market linkages; Vector autoregression; Variance decomposition.
    Date: 2015
  5. By: Grégory Claeys; Zsolt Darvas; Alvaro Leandro
    Abstract: Highlights • Pro-cyclical fiscal tightening might be one reason for the anaemic economic recovery in Europe, raising questions about the effectiveness of the EU’s fiscal framework in achieving its two main objectives - public debt sustainability and fiscal stabilisation. • In theory, the current EU fiscal rules, with cyclically adjusted targets, flexibility clauses and the option to enter an excessive deficit procedure, allow for large-scale fiscal stabilisation during a recession. However, implementation of the rules is hindered by the badly-measured structural balance indicator and incorrect forecasts,leading to erroneous policy recommendations. The large number of flexibility clauses makes the system opaque. • The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives, more transparent, easier to implement and which have a higher potential to be complied with. • The best option, re-designing the fiscal framework from scratch, is currently unrealistic. Therefore we propose to eliminate the structural balance rules and tointroduce a new public expenditure rule with debt-correction feedback, embodied in a multi-annual framework, which would also support the central bank’s inflation target. A European Fiscal Council could oversee the system.
    Date: 2016–03
  6. By: Cette, Gilbert (Banque de France); Fernald, John G. (Federal Reserve Bank of San Francisco); Mojon, Benoit (Banque de France)
    Abstract: In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.
    JEL: D24 E23 E44 F45 O47
    Date: 2016–03–28
  7. By: Mandler, Martin; Scharnagl, Michael; Volz, Ute
    Abstract: We study cross-country differences in monetary policy transmission across the large four euro-area countries (France, Germany, Italy and Spain) using a large Bayesian vector autoregressive model with endogenous prior selection. Drawing both on the posterior distributions of the cross-country differences in impulse responses as well as on a battery of other tests, we find real output to respond less negatively in Spain to monetary policy tightening than in the other three countries, while the decline in the price level is weaker in Germany. Bond yields rise more strongly and more persistently in France and Germany than in Italy and Spain.
    Keywords: monetary policy,transmission mechanism,euro area,Bayesian vector autoregression
    JEL: C11 C54 E52
    Date: 2016
  8. By: Claudio Morana (Università di Milano Bicocca, CeRP-Collegio Carlo Alberto and Rimini Centre for Economic Analysis)
    Abstract: The paper investigates the macroeconomic and financial effects of oil prices shocks in the euro area since its creation in 1999, with a special focus on the recent slump. The analysis is carried out episode by episode, within a time-varying parameter framework, consistent with the view that "not all the oil price shocks are alike", yet without imposing any a priori identification assumption. We find evidence of recessionary effects triggered not only by oil price hikes, but also by oil price slumps in some cases, likewise for the most recent episode, which is also rising deflation risk and financial distress. In addition through uncertainty effects, the current slump might then be depressing aggregate demand by increasing the real interest rate, as ECB monetary policy is already conducted at the zero lower bound. The increase in real money balances following the slump points to the accommodation of the shock by the ECB, concurrent with the implementation of the Quantitative Easing policy (Q.E.). Yet, in so far as Q.E failed to generate inflationary expectations within the current and expected environment of soft oil prices, the case for a more expansionary use of fiscal policy than in the past would become compelling, in order to counteract the deflationary and recessionary threats to the euro area.
    Keywords: Oil Price Shocks, Oil Price-macroeconomy Relationship, Risk Factors, Semiparametric Dynamic Conditional Correlation Model, Time-varying Parameter Models
    JEL: E30 E50 C32
    Date: 2016–03
  9. By: Filippo Gori (The Graduate Institute of International and Development Studies)
    Abstract: This paper presents an account of the monetary policy stance for euro area countries from 1999 to the beginning of the crisis in 2008. The analysis starts with the derivation of a synthetic index measuring the average tightness of monetary policy across euro area members. The index is constructed using pseudo-Taylor residuals, obtained from an estimated monetary policy rule for the whole euro area and country speci c fundamentals. This measure is then decomposed to disentangle the role of in ation and fundamental economic dynamics. Results suggest that there were signi cant di erences in monetary policy stance across euro area members over the period considered. Such di erences are primarily driven by wedges in price dynamics, most of which are disconnected from real economic activity.
    Keywords: Monetary policy, Eonia, euro area.
    JEL: E52 E58 E61
    Date: 2016–05–09
  10. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: To what extent are US and Euro Area (EA) inflation expectations determined by foreign shocks? How do transmissions change during the great recession and European sovereign debt crisis? We address these questions with a flexible structural VAR model of weekly financial markets’ inflation expectations and an index of commodity futures. For the identification of the model, we exploit the heteroscedasticity of the data. We propose instrument-type regressions to uncover the economic nature and origin of identified shocks. In line with the discussion about global inflation, we find that inflation expectations can be labeled global over short expectations horizons but local at long horizons. While large US macro shocks explain the strong drop in US and EA inflation expectations during the great recession, expectations shocks are the important driver from 2009 on.
    Keywords: Spillover, monetary policy, expectations shocks, financial crisis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2016–03
  11. By: Tom Krebs; Martin Scheffel
    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 services 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 smal size of 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 surpluses is positive for any interest (discount) rate less than 9 percent.
    Keywords: Fiscal reforms;Germany;Payroll and social security taxes;Tax reforms;Primary education;Services sector;Econometric models;Structural reform, macroeconomic model, Germany, labor tax, professional services, child care, schooling
    Date: 2016–04–25
  12. By: Manuel García-Santana (UPF, Barcelona GSE and CEPR); Josep Pijoan-Mas (CEMFI and CEPR); Enrique Moral-Benito (Banco de España); Roberto Ramos (Banco de España)
    Abstract: Spanish GDP grew at an average rate of 3.5% per year during the 1995-2007 expansion, well above the EU average of 2.2%. However, this growth was based on factor accumulation rather than productivity gains as TFP fell at an annual rate of 0.7%. Using firm-level administrative data for all sectors we show that deterioration in the allocative efficiency of productive factors across firms was at the root of the low TFP growth in Spain, while misallocation across sectors played only a minor role. We show that within-industry misallocation of production factors increased substantially over the period in all industries. Absent such deterioration, average TFP growth would have been around 0.8% per year, in line with the growth of the technological frontier. Cross-industry variation reveals that the increase in misallocation was more severe in sectors where the incidence of regulations is greater. In contrast, sectoral differences in financial dependence, skill intensity, innovative content, tradability and the intensity of capital structures appear to be unrelated to changes in allocative efficiency. All in all, the observed high output growth together with increasing firm-level misallocation in all sectors is consistent with an expansion driven by a demand boom rather than by structural reforms
    Keywords: TFP, misallocation, Spain.
    JEL: D24 O11 O47
    Date: 2016–05
  13. By: José Ignacio Conde-Ruiz; Clara I. González
    Abstract: Ageing is the major challenge for the PAYG pension systems in developed countries. Most of them are undergoing reforms in order to adapt to the new demographic reality. The package of reforms implemented includes increasing the retirement age, reducing the replacement rate, or introducing a sustainability factor linking pension to life expectancy. The aim of this paper is to analyse the potential consequences of a different type of reform that is at a very incipient stage in Spain but that could have a significant impact if it were fully implemented. This reform, called ‘silent reform’ because it is imperceptible to citizens in its early stages, basically consists in increasing maximum pensions in line with inflation instead of wage or productivity growth. This policy is reducing the replacement rate only for high earning workers and increasing the redistributive component of the system. This paper is the first to quantify and evaluate the potential consequences of this type of reform in Spain. We have used an accounting model with heterogeneous agents and overlapping generations in order to project pension expenditure for the next five decades. The results show that this type of reform could potentially contain future expenditure but at the cost of changing the nature of the pension system from a contributory or Bismarckian-type system into a pure redistributive pension system or Beveridgean-type one. The paper also shows that the institutional characteristics (i.e. the existence of maximum limits to pensions and contributions) that make this kind of reform possible are also present in the majority of developed countries with Bismarckian pension systems. Therefore, the lessons learned in this paper could be useful to other countries.
    Date: 2016–04
  14. By: L. Marattin; S. Meraglia
    Abstract: We analyze fiscal rules within a Monetary Union in the presence of (i) asymmetric information on member states’ potential output and (ii) bail-out among member states. The first-best deficit is contingent on the cycle, that is, on member states’ output gap. In the presence of asymmetric information and bailout, the first-best deficit is not implementable. Bail-out lowers the scope for signalling (discrimination) by member states (lenders) and induces overborrowing by member states characterized by a low output gap. The Monetary Union can design a mechanism such that a member state with a smaller negative output gap runs an optimal budget deficit upon receiving a transfer form the Union. We show that, this ‘cyclically-contingent’ fiscal framework Pareto dominates the ‘cyclically-adjusted’ fiscal rule currently enforced by the European Monetary Union. Our model can then account for a situation where both asymmetric information over cyclical positions and the presence of bail-out among member states does not induce borrowing distortions.
    JEL: E62 D82 F33 F34
    Date: 2016–04
  15. By: Ananya Kotia; Victor Duarte Lledo
    Abstract: This paper studies how fiscal rules interact with the intergovernmental fiscal framework to foster fiscal discipline among European subnational governments. We use political variables describing the fiscal attitudes of the central government as instruments to obtain consistent estimates of the impact of subnational fiscal rules on fiscal balances. The results suggest that the discipline-enhancing effect of fiscal rules is weaker when there are large “vertical fiscal imbalances†that is, large differences in revenue and spending assignments across the different levels of government. These findings imply that separate reforms to reduce excessive vertical fiscal imbalances complement a rules-based fiscal framework that is aimed at fostering fiscal discipline.
    Keywords: Fiscal rules;Europe;Fiscal policy;Intergovernmental fiscal relations;Fiscal balance;Econometric models;Fiscal policy, fiscal rules, fiscal discipline, intergovernmental relations, Europe
    Date: 2016–04–07
  16. By: Kollmann, Robert; Leeper, Eric; Roeger, Werner
    Abstract: The global financial crisis of 2007-09 triggered a sharp fall in output growth that was followed by a persistent slump in Europe and other advanced economies. Almost a decade after the outbreak of the global financial crisis, the recovery remains very weak in many major advanced economies. This special issue of the European Economic Review consists of eleven papers that offer novel empirical and theoretical perspectives on the persistent post-crisis slump and on resulting challenges for global monetary and fiscal policies. All papers were presented at a conference at the European Commission in Brussels on 1-2 October 2015, organized by the European Economic Review, the European Commission, CAEPR, Indiana University and ECARES.
    Keywords: Global financial crisis, post-crisis slump, monetary and fiscal policy, secular stagnation.
    JEL: E2 E3 E4 E5 E6 F2 F3 F4 F6 G1
    Date: 2016
  17. By: Ioanna C. Bardakas (Bank of Greece)
    Abstract: This note examines the relative importance of cyclical and structural factors in determining Greece’s current account performance. I use a number of filters to remove the long-term component and isolate the cyclical factors. It is shown that for the last 15-years the structural component explains most of the variation in the current account. Cyclical factors show small increase in importance during the economic crisis. Thus, for any improvement in the current account to become permanent emphasis should be placed, among others, in the adjustment of structural factors such as development of import substitution and export promotion strategies and in finding ways to improve flows of trade-financing to exporting firms.
    Keywords: Cyclical factors; structural factors; current account performance; filtering methods
    JEL: C01 F14
    Date: 2016–04
  18. By: Thibault Darcillon (Centre d'Economie de la Sorbonne)
    Abstract: This article aims at analyzing the role of the interactions between financial deregulation policies and changes in top tax marginal rates to explain the evolution in top income shares since the 1980s in most OECD countries. I argue that higher financial integration should have an increasing-effect on top income shares by resulting in lower marginal top tax rates. First, international financial integration has gradually contributed to increased tax competition by raising capital mobility. Second, financial integration also reflects higher bargaining power for top earners, pushing for a reduction in marginal top tax rates. Based on instrumental variables and simultaneous equations system regressions, I find strong evidence of my hypothesis: first, financial integration is negatively correlated with higher top marginal tax rates; second, this result seems to explain the negative relationship between marginal top tax rates and top income shares
    Keywords: Financial integration, top income shares; tax policy
    JEL: G1 I39 J63
    Date: 2016–04
  19. By: Jiaqian Chen; Francesco Columba
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households face a ceiling on their loan-to-value ratio and must amortize their mortgages. The government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy, and they are less costly in terms of foregone consumption. A tighter macroprudential stance is also found to be welfare improving, by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.
    Keywords: Housing;Sweden;Mortgages;Housing prices;Debt;Macroprudential Policy;Monetary policy;General equilibrium models;Macroprudential Policies; Monetary Policy; Collateral Constraints
    Date: 2016–03–23

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