nep-eec New Economics Papers
on European Economics
Issue of 2016‒10‒23
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Southern Europe's institutional decline By Edouard Challe; Jose Ignacio Lopez; Eric Mengus
  2. Autonomous demand and economic growth: some empirical evidence By Girardi , Daniele; Pariboni, Riccardo
  3. The Eurozone deposit rates' puzzle: choosing the right benchmark By Julien Pinter; Charles Boissel
  4. Income convergence during the crisis: did EU funds provide a buffer? By Silvia Merler
  5. An Index of Global Economic Policy Uncertainty By Steven J. Davis
  6. VAT Evasion in Bulgaria: A General-Equilibrium Approach By Aleksandar Vasilev
  7. Foreign holders of Italian government debt securities: new evidence By Valerio Della Corte; Stefano Federico
  8. The role of bank credit allocation: Evidence from the Spanish economy By Marko Petrovic; Andrea Teglio; Simone Alfarano
  9. Prudential filters, portfolio composition and capital ratios in European banks By I. Argimon; M. Dietsch; A. Estrada
  10. Structural changes in the labor market and the rise of early retirement in Europe By Anna Batyra; David de la Croix; Olivier Pierrard; Henri Sneessens
  11. Relationship Between Inflation and Economic Activity and Its Variation Over Time in Latvia By Andrejs Bessonovs; Olegs Tkacevs
  12. An inquiry into the determinants of the profitability of Italian banks By Ugo Albertazzi; Alessandro Notarpietro; Stefano Siviero
  13. Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach By Pierluigi Bologna; Anatoli Segura
  14. Determinants of real convergence in Central and Eastern Europe By Petrevski, Goran; Gockov, Gjorgji; Makreshanska-Mladenovska, Suzana
  15. Restricting the use of cash in the European Monetary Union By Siekmann, Helmut

  1. By: Edouard Challe (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique); Jose Ignacio Lopez (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique); Eric Mengus (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The run up to the euro currency initiated a period of capital inflows into southern European countries, i.e., Spain, Portugal, Italy and Greece. We document that those countries, and only them among OECD countries, concomitantly experienced a decline in the quality of their institutions. We confirm the joint pattern of capital in- flows and institutional decline in a large panel of countries. We show theoretically that this joint pattern naturally follows from a “soft budget constraint” syndrome wherein persistently cheap external funding undermines incentives to maintain good institutions –understood here as the degree of government commitment not to support inefficient firms. Low institutional quality ultimately raises the share of inefficient firms, which lowers average productivity and raises productivity dispersion across firms –the typical pattern of productivity in southern Europe over the period under consideration.
    Keywords: TFP, institutions, current account
    Date: 2016–06–09
  2. By: Girardi , Daniele (University of Siena); Pariboni, Riccardo (University of Siena)
    Abstract: According to the Sraffian supermultiplier model, economic growth is driven by autonomous demand (exports, public spending and autonomous consumption). This paper tests empirically some major implications of the model. For this purpose, we calculate time-series of the autonomous components of aggregate demand and of the supermultiplier for the US, France, Germany, Italy and Spain and describe their patterns in recent decades. Changes in output and in autonomous demand are tightly correlated, both in the long and in the short-run. The supermultiplier is substantially higher and more stable in the US, while in the European countries it is lower and decreasing. Where the supermultiplier is reasonably stable - i.e., in the US since the 1960s - autonomous demand and output share a common long-run trend (i.e, they are cointegrated). The estimation of a Vector Error-Correction model (VECM) on US data suggests that autonomous demand exerts a long-run effect on GDP, but also that there is simultaneous causality between the two variables. We then estimate the multiplier of autono-mous spending through a panel instrumental-variables approach, finding that a one dollar increase in autonomous demand raises output by 1.6 dollars over four years. A further implication of the model that we test against em-pirical evidence is that increases in autonomous demand growth tend to be followed by increases in the invest-ment share. We find that this is the case in all five countries. An additional 1% increase in autonomous demand raises the investment share by 0.57 percentage points of GDP in the long-run.
    Keywords: Growth; Effective Demand; Supermultiplier
    JEL: B51 E11 E12 O41
    Date: 2015–10
  3. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, University of Amsterdam [Amsterdam] - UvA - University of Amsterdam, Université Saint-Louis Bruxelles - Université Saint-Louis Bruxelles); Charles Boissel (Paris HEC - Campus HEC Paris)
    Abstract: The paper proposes an alternative benchmark to the EURIBOR to analyze the post-crisis puzzling behavior of deposit rates in the Eurozone. Using bank-level CDS data for 6 major euro-countries, we build a simple country-level index for banks' cost of unsecured funding. The use of this index instead of the traditionally used EURIBOR restores the cointegration relationship between deposit rates and their reckoned opportunity cost. It also suggests that deposits have actually not been significantly over-remunerated in most euro area countries since the financial crisis, in contrast with what is often argued. Our index appears as a good alternative to the EURIBOR, which we show has become irrelevant for many countries.
    Keywords: deposit rates,euribor,cointegration,panel estimates,banks
    Date: 2016–08
  4. By: Silvia Merler
    Abstract: Economic convergence is at the heart of European Union integration. The importance of this objective has not diminished over time, and it is especially relevant in light of the economic crisis that has exacted a heavy toll on EU countries and created scepticism about the merits of EU policies. The author looks at how economic convergence evolved in different regions during the crisis and assess the role played by those funds that are provided to the more disadvantaged regions, with the aim of facilitating their convergence to average EU income levels. Both an absolute and a conditional convergence analysis were run, using regional data on per capita GDP in purchasing power standard. Convergence continued during the crisis for the EU as a whole, although at a slower pace, but for regions in the EU14, and especially in the euro area, convergence appears to have stopped during the crisis, or even switched to a divergence path. The funds’ eligibility rules were exploited in order to construct a quasi-experimental framework, based on comparable treatment and control group of regions. Regional policy played an important role in limiting the effects of the crisis at the region level, by providing an important anchor for convergence in those regions that benefited from the funds.
    Date: 2016–10
  5. By: Steven J. Davis
    Abstract: Building on Baker, Bloom and Davis (2016), I construct a monthly index of Global Economic Policy Uncertainty (GEPU) from January 1997. The GEPU Index is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters. The GEPU Index rises sharply in reaction to the Asian Financial Crisis, the 9/11 terrorist attacks, the U.S.-led invasion of Iraq in 2003, the Global Financial Crisis in 2008-09, the European immigration crisis, concerns about the Chinese economy in late 2015, and the Brexit referendum in June 2016. It fluctuates around consistently high levels from mid 2011 to early 2013, a period characterized by recurring sovereign debt and banking crises in the Eurozone, intense partisan battles over fiscal and healthcare policies in the United States, and a generational leadership transition in China. The average value of the GEPU Index is 60 percent higher from July 2011 to August 2016 than in the previous fourteen and one-half years and 22 percent higher than in 2008-09.
    JEL: D80 E66 G18 L50
    Date: 2016–10
  6. By: Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a non-di erentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than one-fourth of output, an estimate which is in line with the gures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion.
    Keywords: VAT evasion, general equilibrium, Bulgaria
    JEL: D58 E26 H26 K42
    Date: 2016–10
  7. By: Valerio Della Corte (Bank of Italy); Stefano Federico (Bank of Italy)
    Abstract: Drawing on data from the Eurosystem’s recent Securities Holdings Statistics (SHS) and the IMF’s Coordinated Portfolio Investment Survey (CPIS), the paper provides a detailed breakdown of foreign holders of Italian government securities by sector and geographical area. We estimate that euro-area investors held more than 60 per cent of the Italian general government securities held by non-residents at the end of 2015; the sector in the euro area holding the largest share was 'other financial intermediaries' (predominantly non-money market funds), followed by banks and the insurance industry and pension funds. We also show that foreign demand for Italian government debt was mainly driven by euro-area countries in 2014, while in 2015 it mostly reflected purchases made by investors outside the euro area.
    Keywords: securities holdings, cross-border investment, sovereign debt
    JEL: F30 G10 H60
    Date: 2016–10
  8. By: Marko Petrovic (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Andrea Teglio (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Simone Alfarano (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: This paper investigates the determinants of bank credit allocation in Spain from 1999 to 2014, studying in particular the relation between bank credit and total assets in firms balance sheets. The main finding of the paper is that the allocation of bank credit to firms is strongly affected by firms’ size. We show that the amount of bank credit accumulated by a company is more that proportional than its total assets. This leaded in Spain to a notable concentration of bank credit in the hands of the biggest companies of the country. We also find that during the Spanish boom, from 1999 to 2007, bank credit sharply shifted from manufacturing to construction industry and in particular to the biggest companies of the last sector. In the same period, the concentration of bank credit continuously raised, reaching its peak in conjunction with the crisis of 2008. This process increased the leverage of big firms (especially in the construction sector), many of which defaulted during the crisis. The estimation of parametric and semiparametric selection models confirms our findings. Overall, paper’s results raise queries about the correct channelling of bank credit into the economy and about its consequences.
    Keywords: Firms Size, Bank Credit, Loans, Distributions, Credit Allocation, Selection Model
    JEL: G21 L11 C24
    Date: 2016
  9. By: I. Argimon; M. Dietsch; A. Estrada
    Abstract: European banks hold 10% of their total assets in portfolios that give rise to unrealised gains and losses which under Basel III will no longer be allowed to be excluded from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different regulatory treatments that are allowed, under Basel II, to account for such gains and losses among jurisdictions and instruments and over time, we find evidence that: a) the inclusion of unrealised gains and losses in capital ratios increases their volatility; b) the partial inclusion of unrealised gains and total inclusion of losses on fixed-income securities in regulatory capital, compared with the complete exclusion of both (or “neutralization”), reduces the volume of securities categorised as Available For Sale (AFS), thus potentially affecting liquidity management and demand for bonds (most of which are currently government bonds); and c) the higher the partial inclusion of gains from debt instruments, the lower the holdings of such instruments in the AFS category and the higher the regulatory Tier 1 capital ratio, thus affecting banks’ capital buffer strategy. We do not find evidence that the absence of neutralisation would impact capital ratios.
    Keywords: Bank capital ratios, Bank regulation, Fair Value Accounting, Prudential Filters.
    JEL: G21 M41
    Date: 2016
  10. By: Anna Batyra (Bogazici University, Istanbul); David de la Croix (IRES - CORE, Université catholique de Louvain); Olivier Pierrard (Banque centrale du Luxembourg); Henri Sneessens (CREA, Université du Luxembourg - IRES, Université catholique de Louvain)
    Abstract: The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. Contrary to a purely neoclassical framework, a model with imperfectly competitive labor market also allows to consider the effect of the bargaining power of labor and matching efficiency on preretirement. We find that lower bargaining power of workers and less efficient labor markets characterized by the declining matching efficiency have been an important determinant of early retirement in France and Germany. These structural changes, combined with early-retirement transfers and population ageing, are also consistent with the joint evolution of employment and unemployment rates, the labor share and the seniority premium.
    Keywords: Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Labor Market Policy and Institutions
    JEL: E24 H55 J26 J64
    Date: 2016
  11. By: Andrejs Bessonovs (Bank of Latvia); Olegs Tkacevs (Bank of Latvia)
    Abstract: This paper studies the relationship between inflation and economic slack in Latvia with a particular focus on its time variation. The results suggest that the Phillips curve for Latvia had been steepening before the crisis against the backdrop of rising inflation. In the more recent years, there has been tentative evidence of the Phillips curve flattening as Latvia's economy entered a period of very low inflation. If the current trend of an even weaker response of inflation to economic activity in Latvia persists and proves to be statistically significant, unconventional monetary policy instruments may be of limited effectiveness to control inflation in Latvia. This calls for structural reforms aimed at increasing competition and reducing price stickiness.
    Keywords: inflation, Phillips curve, business cycles, Bayesian estimation
    JEL: C32 C51 E31 E52
    Date: 2016–09–23
  12. By: Ugo Albertazzi (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy’s Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.
    Keywords: bank profits, bank capital, non-performing loans, Italian banks, Italian economy
    JEL: E37 E44 E47 G21
    Date: 2016–10
  13. By: Pierluigi Bologna (Bank of Italy); Anatoli Segura (Bank of Italy)
    Abstract: In the post-crisis era banks’ capital adequacy is established by the Basel III capital standards and, in many jurisdictions, also by supervisory stress tests. In this paper we first describe the ways in which supervisory stress tests can supplement the risk-based capital framework of Basel III and how this could be codified with a stress test buffer. We then argue that in order to ensure coherence with the macroprudential objectives of Basel III, the severity of supervisory stress tests should be procyclical. In addition, to increase the transparency and predictability of the overall capital framework, severity choices should follow a constrained discretion approach based on a simple rule. Finally, we analyze supervisory stress testing practices across some jurisdictions and find that while the United States and the UK frameworks are in line with some of the elements of our proposal, including most notably the need for procyclical severity, this is not the case in the euro area.
    Keywords: stress test, capital regulation, macroprudential policy
    JEL: G21 G28
    Date: 2016–10
  14. By: Petrevski, Goran; Gockov, Gjorgji; Makreshanska-Mladenovska, Suzana
    Abstract: This paper deals with the process of convergence of the Central and Eastern European (CEE) countries towards the EU and attempts to identify the main driving factors behind this process. In these regards, we first provide an overview of the real convergence through an analysis of several economic variables – rate of approximation of real GDP per capita and price levels, trade integration, harmonization of the economic structure and achievements in the labor market. In addition, we offer a formal econometric evidence on the main determinants of the convergence process, based on a panel data for 10 CEE countries during 2000-2015 period, estimated with fixed effects. The results of our study imply that higher savings and investment ratio, higher labour productivity, more efficient labour markets (lower unemployment) and macroeconomic stability (lower inflation and lower budget deficits) are conducive to real convergence. However, quite surprisingly, we find that the close trade integration with the EU is associated with lower level of real convergence.
    Keywords: Real convergence, Central and Eastern Europe, European Union, Panel data models, Fixed-effects estimator.
    JEL: O11 O47
    Date: 2016–09–14
  15. By: Siekmann, Helmut
    Date: 2016

This nep-eec issue is ©2016 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.