nep-eec New Economics Papers
on European Economics
Issue of 2017‒02‒26
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro area fiscal stance By Bańkowski, Krzysztof; Ferdinandusse, Marien
  2. Austerity in the Aftermath of the Great Recession By Christopher L. House; Christian Proebsting; Linda L. Tesar
  3. Current Account Dynamics and the Housing Cycle in Spain By Mayer, Eric; Maas, Daniel; Rüth, Sebastian
  4. The Effect of Supranational Banking Supervision on the Financial Sector: Event Study Evidence from Europe By Loipersberger, Florian
  5. Optimal Monetary and Macroprudential Policy in a Currency Union By Schwanebeck, Benjamin; Palek, Jakob
  6. Low inflation in the euro area: Causes and consequences By Ciccarelli, Matteo; Osbat, Chiara
  7. The Economic Impact of East-West Migration on the European Union By Martin Kahanec; Mariola Pytlikova
  8. Austerity and Private Debt By Klein, Mathias
  9. The Macroeconomics Outcome of Oil Shocks in the Small Eurozone Economies By Raphael Raduzzi; Antonio Ribba
  10. Understanding sovereign rating movements in euro area countries By Brůha, Jan; Karber, Moritz; Pierluigi, Beatrice; Setzer, Ralph
  11. Inflation expectations and monetary policy surprises By Elena Andreou; Snezana Eminidou; Marios Zachariadis
  12. Europe in a new world order By Maria Demertzis; André Sapir; Guntram B. Wolff
  13. Banks credit and productivity growth By Hassan, Fadi; di Mauro, Filippo; Ottaviano, Gianmarco I.P.
  14. The Hartz Reforms, the German Miracle, and the Reallocation Puzzle By Bauer, Anja; King, Ian Paul
  15. "The Impact of Refugees on Per Capita Income" A Gravity Model Approach By Nico Stöckmann
  16. How Immigrants Helped EU Labor Markets to Adjust during the Great Recession By Kahanec, Martin; Guzi, Martin

  1. By: Bańkowski, Krzysztof; Ferdinandusse, Marien
    Abstract: This paper analyses the appropriateness of the euro area fiscal stance. In this context, the paper presents the relevant definitions and how the euro area fiscal stance has evolved over time. Furthermore, it contains an evaluation of the appropriateness of the euro area aggregated fiscal stance set out in the European Commission’s Spring 2016 European Economic Forecast, concluding that, while it is broadly appropriate from the stabilisation perspective, it deviates slightly from the sustainability objective. Finally, the paper investigates the impact of a fiscal stimulus in Germany on the main euro area macroeconomic variables under an adverse risk scenario. The analytical exercise conducted in the paper is agnostic about the relative weights of the stabilisation and sustainability objectives and considers them separately. This is distinct from the SGP framework, which synthesises the two, placing a stronger emphasis on the latter. The ultimate aim of this approach is to analyse the possible interactions between the two objectives at the current juncture. JEL Classification: E61
    Keywords: debt sustainability, fiscal stance, output gap, output stabilisation
    Date: 2017–01
  2. By: Christopher L. House; Christian Proebsting; Linda L. Tesar
    Abstract: We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.
    JEL: E00 E62 F41 F44 F45
    Date: 2017–02
  3. By: Mayer, Eric; Maas, Daniel; Rüth, Sebastian
    Abstract: We investigate the negative correlation between housing markets and the current account in Spain. By employing robust sign restrictions, which we derive from a DSGE model for a currency union, we analyze the effects of Spanish pull and Eurozone push factors in a mixed frequency VAR framework. Savings glut, risk premium, and housing bubble shocks are capable of generating the negative co-movement of housing markets and the current account in the data. In contrast, and counterfactual to the housing boom, financial easing shocks in Spain predict a decline in, both, residential investment and house prices. Among the four identifed shocks, savings glut shocks have most explanatory power for real house prices, whereas risk premium shocks account for most of the variation in residential investment. Financial easing shocks explain fluctuations to a similar extend as savings glut and risk premium shocks, while housing bubble shocks explain slightly less variance in the data.
    JEL: E32 F32 F45
    Date: 2016
  4. By: Loipersberger, Florian
    Abstract: This paper investigates how the introduction of the Single Supervisory Mechanism, the European Union’s implementation of harmonized banking supervision, has affected the banking sector in Europe. I perform an event study on banks’ stock returns and find evidence for small but significant positive effects. A potential hypothesis for this result is the fact that a single supervisory authority can take spillover effects between countries into account and is therefore able to stabilize the European banking sector. Splitting the sample by an indicator for supervisory power, an indicator for corruption and by Debt/GDP reveals that the positive impact of the SSM was stronger for banks in countries that perform poorly with respect to these measures.
    Keywords: Banks; event study; supervision; SSM; harmonization
    JEL: G28 H77 F55
    Date: 2017–02
  5. By: Schwanebeck, Benjamin; Palek, Jakob
    Abstract: The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal (Ramsey) monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no difference in the financing of production factors. Evaluating the performance of different policy regimes shows that the additional welfare gain from having country-specific macroprudential tools vanishes as the ability of the central bank to commit decreases.
    JEL: E58 E32 E44
    Date: 2016
  6. By: Ciccarelli, Matteo; Osbat, Chiara
    Abstract: After 2012, inflation has been unexpectedly low across much of the developed world and economists speak of a “missing inflation” puzzle, namely inflation was expected to be higher on the back of an ongoing recovery. This paper investigates the causes and consequences of low inflation in the euro area after 2012 and analyses whether monetary policy has been successful in dampening the risks associated to low inflation. The paper finds that the missing inflation was primarily due to cyclical factors – domestic in the earlier part of the period and global in the latter part – and that the Phillips curve remains a useful tool in understanding inflation dynamics over the period of interest. The succession of negative shocks constrained headline inflation for a prolonged period, and there is evidence of an increase in the persistence of inflation and a fall in the trend inflation rate, which had begun to have a greater influence on longer-term inflation expectations. This may have signalled uncertainty over the effectiveness of unconventional monetary policy measures, but public belief in the ECB’s commitment to keep the annual rate of HICP inflation below but close to 2% has remained intact. The paper concludes that unconventional monetary policy measures are effective in mitigating the downside risks to price stability, curtailing risks of de-anchoring, and expanding aggregate demand. JEL Classification: E31, E52, E58
    Keywords: inflation expectations, low inflation, Phillips curve, unconventional monetary policy
    Date: 2017–01
  7. By: Martin Kahanec; Mariola Pytlikova
    Abstract: This study contributes to the literature on destination-country consequences of international migration with investigations on the effects of immigration from new EU member states and Eastern Partnership countries on the economies of old EU member states over the years 1995-2010. Using a rich international migration dataset and an empirical model accounting for the endogeneity of migration flows we find positive and significant effects of post-enlargement migration flows from new EU member states on old member states’ GDP, GDP per capita, and employment rate and a negative effect on output per worker. We also find small, but statistically significant negative effects of migration from Eastern Partnership countries on receiving countries’ GDP, GDP per capita, employment rate, and capital stock, but a positive significant effect on capital-to-labor ratio. These results mark an economic success of the EU enlargements and EU’s free movement of workers.
    Keywords: EU enlargement, free mobility of workers, migration impacts, European Single Market, east-west migration, Eastern Partnership
    JEL: J15 J61 J68
    Date: 2017–02–16
  8. By: Klein, Mathias
    Abstract: Based on a panel of OECD countries, I provide empirical evidence that the costs of austerity crucially depend on the level of private indebtedness. In particular, fiscal consolidations lead to severe contractions when implemented in high private debt states. Contrary, fiscal consolidations have no significant effect on economic activity when private debt is low. These results are robust for alternative definitions of private debt overhang, the composition of fiscal consolidations and controlling for the state of the business cycle and government debt overhang. Private debt-dependent responses are mainly driven by household debt, whereas the effects differ only slightly with the level of corporate debt. Moreover, in high private debt states austerity induces a substantial fall in house prices. Both of these latter findings indicate that deterioration in household balance sheets are important to understand private debt-dependent effects of austerity. One possible implication of this paper is that the negative effects of large-scale fiscal consolidations undertaken by Southern European countries were likely to be amplified by the high private debt burdens in these economies.
    JEL: C23 E32 E62
    Date: 2016
  9. By: Raphael Raduzzi; Antonio Ribba
    Abstract: In this work we provide an analysis over the period 1999 - 2015 of the effects of oil shocks on prices and GDP in a group of small Euro-area economies. The group includes Austria, Belgium, Finland, Greece, Ireland, Italy, Netherlands, Portugal and Spain. We use the structural near-VAR methodology and are thus able to model the joint interaction of area-wide macroeconomic variables and national variables. We find that under the EMU oil price shocks have been important drivers of business cycle fluctuations in almost all these countries. Moreover, an increase in oil prices produces significant recessionary effects in all the countries included in the investigation. Thus, although there are different sizes in the responses of output in the investigated countries, our main conclusion is that oil prices (still) matter for European economies
    Keywords: Oil Shocks; Business Cycles; Near-Structural VARs; Euro area
    JEL: E31 E32 Q43 C32
    Date: 2017–02
  10. By: Brůha, Jan; Karber, Moritz; Pierluigi, Beatrice; Setzer, Ralph
    Abstract: This paper investigates the link between sovereign ratings and macroeconomic fundamentals for a group of euro area countries which recorded rating downgrades amid the euro area sovereign debt crisis. We apply an elaborated econometric estimation technique, based on a Bayesian ordered probit model, to understand how the decisions of rating agencies can be explained by economic developments. The estimated model re-produces historical ratings by using a small number of economic and institutional variables, which seem to effectively summarize the large number of criteria used by Moody’s, Standard & Poor’s and Fitch in their assignment of sovereign ratings. Our results suggest that the size of the downgrades observed since the start of the sovereign crisis has been broadly in line with the deterioration of economic fundamentals for most countries. JEL Classification: C25, G24, H63, H68
    Keywords: euro area crisis, panel probit model, sovereign debt, sovereign rating
    Date: 2017–02
  11. By: Elena Andreou; Snezana Eminidou; Marios Zachariadis
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers’ inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.
    Keywords: Inflation; Expectations; Unanticipated; Monetary policy; Beliefs; Crisis
    JEL: E31 E52 F41
    Date: 2017–01
  12. By: Maria Demertzis; André Sapir; Guntram B. Wolff
    Abstract: THE ISSUE The United States is the European Union’s most important trade and bilateral investment partner, which has, until now, supported a multilateral trade system and European integration and has provided a security guarantee to the countries of the EU. But like other advanced economies, the US’s relative weight in the global economy has declined. The new US administration seems intent on replacing multilateralism with bilateral deals. In trade, it aims to secure new trade deals in order to reduce bilateral trade deficits and to protect, in particular, the US manufacturing sector. In climate policy, the US commitment to the Paris Agreement is being questioned. In defence, the security umbrella appears less certain than previously. The overall promise behind this change of direction is to put ‘America first’ and deliver better results for US citizens. POLICY CHALLENGE The EU is a relatively open economy and has benefited from the multilateral system. If the US does change from its previous course, the EU should respond with a four-part strategy - (1) Collaborate with partners around the world in defence of the World Trade Organisation; (2) Establish deeper economic relations with China and other partners; in particular, the EU should accelerate discussions on the Bilateral Investment Treaty with China while safeguarding its interests and favouring public courts for dispute settlement; (3) Reform EU trade governance and address internal imbalances, to increase the EU’s external credibility. Moreover, strengthening Europe’s social model would provide a response to protectionist temptations; (4) Prepare tools that could be deployed bilaterally against the US, including WTO-compatible anti-subsidy measures and possible tax measures.
    Date: 2017–02
  13. By: Hassan, Fadi; di Mauro, Filippo; Ottaviano, Gianmarco I.P.
    Abstract: Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries. JEL Classification: G10, G21, G31, D92, O16
    Keywords: bank credit, capital allocation, credit constraints, productivity
    Date: 2017–02
  14. By: Bauer, Anja; King, Ian Paul
    Abstract: We examine the proposition that the German Hartz reforms offset the GFC's effect on unemployment (leading to the "German miracle") and the GFC offset the Hartz reform's effects on reallocation, in Germany (leading to the "reallocation puzzle") over the period 2005-2010. To do so, we use a labor reallocation model based on Lucas and Prescott (1974), but with the additional features of unemployment benefits and rest unemployment. The model generates two simple conditions that must hold for two events to offset each other in this way. We estimate the key parameters of the model to assess the extent to whether these conditions were satisfied in Germany over that period. We find that the observed drop in productivity due to the GFC (6.3%) was very close to the drop required to explain the reallocation puzzle (6.8%). Conditional on this offset taking place, the observed percentage drop in unemployment benefits (16.7%) was approximately twice that required (6.3%) for the German miracle, and consistent with the significant drop in unemployment over the period.
    JEL: E24 J24 E65
    Date: 2016
  15. By: Nico Stöckmann (Paderborn University)
    Abstract: I extend the bilateral Gravity Model of migration by Vanderkamp (1977) based on Newton's Law to a unilateral instrumental variable strategy for refugees, which is able to reflect time dependent shocks. Controlling for population size, trade openness, unemployment and the migrant stock in a panel data for subsequent members of the European Monetary Union in the short and mid run after the Balkan crisis leads to a significant negative impact of incoming refugees on the host country's per capita income.
    Date: 2017–02
  16. By: Kahanec, Martin (Central European University); Guzi, Martin (Masaryk University)
    Abstract: The economic literature starting with Borjas (2001) suggests that immigrants are more flexible than natives in responding to changing sectoral, occupational, and spatial shortages in the labor market. In this paper, we study the relative responsiveness to labor shortages by immigrants from various origins, skills and tenure in the country vis-à-vis the natives, and how it varied over the business cycle during the Great Recession. We show that immigrants in general have responded to changing labor shortages across EU member states, occupations and sectors more fluidly than natives. This effect is especially significant for low-skilled immigrants from the new member states or with the medium number of years since immigration, as well as with high-skilled immigrants with relatively few (1-5) or many (11+) years since migration. The relative responsiveness of some immigrant groups declined during the crisis years (those from Europe outside the EU or with eleven or more years since migration), whereas other groups of immigrants became particularly fluid during the Great Recession, such as those from new member states. Our results suggest immigrants may play an important role in labor adjustment during times of asymmetric economic shocks, and support the case for well-designed immigration policy and free movement of workers within the EU. Paper provides new insights into the functioning of the European Single Market and the roles various immigrant groups play for its stabilization through labor adjustment during times of uneven economic development across sectors, occupations, and countries.
    Keywords: immigrant worker, labor supply, skilled migration, labor shortage, wage regression, Great Recession
    JEL: J24 J61 J68
    Date: 2016–12

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