nep-eec New Economics Papers
on European Economics
Issue of 2017‒03‒12
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Investigating First-Stage Exchange Rate Pass-Through: Sectoral and Macro Evidence from Euro Area Countries By Cheikh, Nidhaleddine Ben; Rault, Christophe
  2. A panel VAR analysis of macro-financial imbalances in the EU By Comunale, Mariarosaria
  3. Heterogeneity in euro area monetary policy transmission: results from a large multi-country BVAR model By Scharnagl, Michael; Mandler, Martin; Volz, Ute
  4. Post-Brexit FEER By Jamel Saadaoui
  5. Institutional investors and home bias in Europe’s Capital Markets Union By Zsolt Darvas; Dirk Schoenmaker
  6. Dynamic Impact of Credit Risk on the Real Economy in European Countries By Shota Kai; Yoichi Matsubayashi
  7. Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters By Glas, Alexander; Hartmann, Matthias
  8. Stabilising virtues of central banks: (re)matching bank liquidity By Legroux, Vincent; Rahmouni-Rousseau, Imène; Szczerbowicz, Urszula; Valla, Natacha
  9. The Symmetry of ECB Monetary Policy Impact Under Scrutiny: An Assessment By Andrea Venegoni; Massimiliano Serati
  10. The role of counterparty risk and asymmetric information in the interbank market By Cappelletti, Giuseppe; Guazzarotti, Giovanni
  11. Central Bank Policies and the Debt Trap By Orphanides, Athanasios
  12. Endogenous Asymmetric Shocks in the Eurozone. The Role of Animal Spirits By De Grauwe, Paul; Ji, Yuemei
  13. The effect of public investment in Europe: a model-based assessment By de Jong, Jasper; Ferdinandusse, Marien; Funda, Josip; Vetlov, Igor
  14. Fiscal space on the eurozone periphery: The case of Spain By Uxó González, Jorge; Álvarez, Ignacio; Febrero, Eladio
  15. Demand and Supply of Populism By Luigi Guiso; Helios Herrera; Massimo Morelli; Tommaso Sonno
  16. EU Membership or Thatcher's Structural Reforms: What Drove the Great British Reversal? By Campos, Nauro F; Coricelli, Fabrizio
  17. ‘Real’ flexicurity worlds in action: evidence from Denmark and Greece By Konstantinos Kougias
  18. Accounting for Wealth Inequality Dynamics: Methods, Estimates and Simulations for France (1800-2014) By Garbinti, Bertrand; Goupille-Lebret, Jonathan; Piketty, Thomas
  19. The Impact of Brexit on Foreign Investment and Production By Ellen R. McGrattan; Andrea Waddle
  20. Financial transaction taxes, market composition, and liquidity By Colliard, Jean-Edouard; Hoffmann, Peter
  21. "How Germany's Anti-Keynesianism Has Brought Europe to Its Knees" By Jorg Bibow

  1. By: Cheikh, Nidhaleddine Ben (ESSCA School of Management); Rault, Christophe (University of Orléans)
    Abstract: In this paper, we evaluate the first-stage pass-through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aims to shed further light on the role of microeconomic factors vs. macroeconomic factors in influencing the extent of the exchange rate pass-through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass-through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross-country differences in pass-through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass-through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass-through. Using the System Generalized Method of Moments within a dynamic panel-data model, our estimates indicate that decline of import-price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first three years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass-through is comprised of both macro- and microeconomic aspects that policymakers should take into account.
    Keywords: exchange rate pass-through, import prices, dynamic panel data
    JEL: E31 F31 F40
    Date: 2017–02
  2. By: Comunale, Mariarosaria
    Abstract: We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run. JEL Classification: F32, F31, C33
    Keywords: current account, financial gaps, foreign capital flows, panel VAR, real effective exchange rate
    Date: 2017–02
  3. By: Scharnagl, Michael; Mandler, Martin; 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 to a monetary policy tightening in Spain than in the other three countries while the price level decline is weaker in Germany. Bond yields rise stronger and more persistently in France and Germany than in Italy and Spain.
    JEL: C11 C54 E52
    Date: 2016
  4. By: Jamel Saadaoui
    Abstract: From the onset of the euro crisis to the Brexit vote, we have assisted to impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement of external competitiveness. In this paper, we provide new estimates of exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. In order to take into account that business cycles are desynchronized in the euro area, we include the correction of Isard and Faruqee (1998) in the FEER methodology of Jeong et al. (2010a). This approach allows to detect reduction of exchange rate misalignments due to improvement of external competitiveness. Besides, it offers a solution to the problem of over-determination in exchange rate models inspired by the SMIM of Cline (2008). Overall, peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations.
    Keywords: Equilibrium Exchange Rate, Brexit, Internal Devaluation
    Date: 2016–11
  5. By: Zsolt Darvas; Dirk Schoenmaker
    Abstract: Integrated capital markets facilitate risk sharing across countries. Lower home bias in financial investments is an indicator of risk sharing. We highlight that existing indicators of equity home bias in the literature suffer from incomplete coverage because they consider only listed equities. We also consider unlisted equites and show that equity home bias is much higher than previous studies perceived. We also analyse home bias in debt securities holdings, and euro area bias. We conclude that European Union membership may foster financial integration and reduce information barriers, which sometimes limit cross-country diversification. We calculate home bias indicators for the aggregate of the euro area as if the euro area was a single country and report remarkable similarity between the euro area and the United States in terms of equity home bias, while there is a higher level of debt home bias in the United States than in the euro area as a whole. We develop a new pension fund foreign investment restrictions index to control for the impact of prudential regulations on the ability of institutional investors to diversify geographically across borders. Our panel regression estimates for 25 advanced and emerging countries in 2001-14 provide strong support for the hypothesis that the larger the assets managed by institutional investors (defined as pension funds, insurance companies and investment funds), the smaller the home bias and thereby the greater the scope for risk sharing.
    Date: 2017–03
  6. By: Shota Kai (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: Using local projection, this study investigates the dynamic effect of credit risk on the real economy in European countries. We obtain credit spread shocks of nancial and non- nancial institutions in four major eurozone countries by controlling their endogenous changes caused by fear of the global nancial market, the European Central Bank's monetary policy and the anxiety of national government debt. Our rst nding is that industrial production responses to the non- nancial institution credit spread shock are earlier than that for the nancial institution shock. Second, in the case of rising credit risk, Germany, France and Finland increase bank lending to domestic companies. Finally, we nd that these two tendencies were mainly due to the European common factor by verifying the impulse response functions to idiosyncratic credit spread shocks. We conclude that credit risks in each country are largely common in the eurozone.
    Keywords: Credit Risk, Local Projection, Financial Crisis, Euro Area
    JEL: C32 E44 E47 G32
  7. By: Glas, Alexander; Hartmann, Matthias
    Abstract: We analyze the determinants of average individual inflation uncertainty and disagreement based on data from the European Central Bank’s Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods.
    JEL: E31 E52 E58
    Date: 2016
  8. By: Legroux, Vincent; Rahmouni-Rousseau, Imène; Szczerbowicz, Urszula; Valla, Natacha
    Abstract: Central banks have been blamed for the negative side effects of the non-conventional monetary policy measures they have implemented since 2008. In this paper, we argue that central banks played a positive role in the money market and interbank liquidity recovery. Using novel, micro data of the French banking system on the pool of collateral eligible to ECB open market operations, we construct a "liquidity mismatch indicator (LMI)" for the aggregate banking sector that highlights the central bank influence on the bank liquidity condition. Our results show that central bank liquidity and haircut policies have indeed helped banks to reduce the mismatch of liquidity between their assets and their liabilities that had widened after the 2011 stress episode. Moreover, our bank liquidity measure can be useful as an early warning indicator for the macro-prudential purposes. It gives the "cash equivalent value" of the French banking sector and indicates the amount of the liquidity support that the ECB might have to provide in case of financial crisis. The LMI can also help identify the systematically important French institution in terms of their liquidity exposures.
    Keywords: bank liquidity,liquidity crises,unconventional monetary policy,macroprudential regulation
    JEL: E58 G21 G28
    Date: 2017
  9. By: Andrea Venegoni; Massimiliano Serati
    Abstract: Since its inception, EMU adequacy to be an Optimal Currency Area was questioned, and, along with it, the homogeneous transmission of the monetary impulses across the Eurozone. Adopting a Bayesian Time-Varying parameter FAVAR model that fixes the flaws present in the existing literature and exploits a sufficiently extended dataset, we provide an updated assessment of the transmission mechanism’s functioning and of its symmetry along these first years of ECB operations. The empirical analysis shows that the occurrence of the two crises significantly altered the policy transmission, with the interest rate channel being the most affected. Policy-wise, our findings suggest that authorities must push towards a consistent innovation both on fiscal and monetary sides.
    Date: 2017–03
  10. By: Cappelletti, Giuseppe; Guazzarotti, Giovanni
    Abstract: We study the effect of counterparty risk on the ability of Italian banks to access the foreign unsecured interbank market during the sovereign debt crisis in the second half of 2011. With the onset of the crisis, interest rates in the Italian interbank market soared and foreign lending decreased significantly. To isolate the effect of the rise in counterparty risk, we compare the funding of Italian banks with that of foreign banks? branches and subsidiaries in Italy, which were presumably unaffected by the sovereign crisis insofar as they could count on the actual or potential support of their parent bank. We find that the rise in counterparty risk substantially decreased the probability of obtaining funds from foreign banks. When the analysis is restricted to Italian and foreign banks with relatively comparable asset compositions, the result holds. In addition, where safer banks or more stable lending relationships are involved the effect is attenuated. JEL Classification: G21, G28, C23, C24
    Keywords: counterparty risk, financial crisis, interbank market
    Date: 2017–02
  11. By: Orphanides, Athanasios
    Abstract: Monetary policy and fiscal dynamics are inexorably linked. When a government faces the risk of getting caught in a high debt trap, debt monetization may become an appealing option. However, independent central banks may be able to allay debt concerns without compromising price stability. One option is financial repression which, despite associated distortions, can create some fiscal space while preserving price stability. Financial repression is a feature of quantitative easing, which has proven to be an effective policy tool at the zero lower bound. This paper examines the policies of the Federal Reserve, the Bank of Japan and the ECB in relation to debt dynamics for the United States, Japan, Germany and Italy since the crisis. Important differences are identified across the four states, reflecting differences in the policy choices of the three central banks. While decisive QE policies by the Federal Reserve and, more recently, by the Bank of Japan have been effective, ECB policies have had decidedly uneven consequences on Germany and Italy. The normalization of the Federal Reserve’s balance sheet is also discussed in a historical context.
    Keywords: Bank of Japan; debt sustainability; ECB; Federal Reserve; financial repression; Germany; Italy; Japan; Quantitative easing; United States
    JEL: E52 E58 E61 G12 H63
    Date: 2017–02
  12. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: Business cycles among Eurozone countries are highly correlated. We develop a two-country behavioral macroeconomic model in a monetary union setting where the two countries are linked with each other by international trade. The net export of country 1 depends on the output gap of country 2 and on real exchange rate movements. The synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of "animal spirits" , i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We analyze the role of the common central bank in this propagation mechanism. We explore the transmission of demand and supply shocks and we study how the central bank affects this transmission. We verify the main predictions of the model empirically.
    Keywords: animal spirits; behavioral macroeconomics; Business Cycles; monetary union
    Date: 2017–03
  13. By: de Jong, Jasper; Ferdinandusse, Marien; Funda, Josip; Vetlov, Igor
    Abstract: We consider the effect of an increase in public investments on output in Europe against the background of a sharp drop of public investments in a number of EU countries during the crisis and subsequent policy discussions on the need to stimulate public investments. We start with a brief overview of recent developments in public investments, including some methodological issues, and provide a literature overview of the effect of public investments on growth. On the basis of updated estimates of the public capital stock, we estimate the output response to a public capital impulse, using VAR models. In addition, using a structural model, we investigate the sensitivity of the macroeconomic impact of an increase in public investments to alternative assumptions about economic structures and policy implementations. JEL Classification: E32, E62, C30
    Keywords: euro area, fiscal policy, general equilibrium modelling, public investment
    Date: 2017–02
  14. By: Uxó González, Jorge; Álvarez, Ignacio; Febrero, Eladio
    Abstract: On the one hand, every official document about fiscal policy in Spain, and most orthodox academic papers argue that Spain has no "fiscal space" and that it should apply resolute actions to assure budget consolidation. On the other hand, Spain also had the second highest unemployment rate in the Eurozone in 2015: 21% of the active population. A rapid decline in that rate would require a higher fiscal impulse to sustain higher economic growth rates. This paper addresses this dilemma, presenting two alternative scenarios for the coming years and analyzing their impact on unemployment and fiscal sustainability. The first scenario represents a firm commitment to budget consolidation, while in the second the government uses the fiscal instrument to stimulate domestic demand and ensure a GDP growth rate target. The second scenario is based on an application of an "imperfect" balanced budget multiplier, proposing a combination of discretionary increases in both public expenditure and revenue. The main conclusion is that the end of fiscal austerity is feasible and perfectly compatible with fiscal finances sustainability for Spain.
    Keywords: Fiscal Policy,Fiscal Space,Functional Finance,Balance Budget Multiplier,Spain
    JEL: E61 E62
    Date: 2017
  15. By: Luigi Guiso (EIEF and CEPR); Helios Herrera (Warwick University); Massimo Morelli (Bocconi University and CEPR); Tommaso Sonno (Université Catholique de Louvain)
    Abstract: We define as populist a party that champions short-term protection policies without regard for their long-term costs. First, we study the demand for populism: we analyze the drivers of the populist vote using individual level data from multiple waves of surveys in Europe. Individual voting preferences are infl uenced directly by different measures of economic insecurity and by the decline in trust in traditional parties. However, economic shocks that undermine voters' security and trust in parties also discourage voter turnout, thus mitigating the estimated demand of populism when ignoring this turnout selection. Economic insecurity affects intentions to vote for populist parties and turnout incentives also indirectly because it causes trust in parties to fall. Second, we study the supply side: we find that populist parties are more likely to appear when the drivers of demand for populism accumulate, and more so in countries with weak checks and balances and with higher political fragmentation. The non-populist parties' policy response is to reduce the distance of their platform from that of new populist entrants, thereby magnifying the aggregate supply of populist policies.
    Date: 2017
  16. By: Campos, Nauro F; Coricelli, Fabrizio
    Abstract: This paper presents a dissonant view on post-war British economic performance. A defining feature is the decline of the UK relative to the six founding members of the European Union after 1945. However, this relative decline stopped. The conventional view is that a turning point occurs in the mid-1980s when Mrs Thatcher implements far-reaching structural reforms. This paper asks whether econometric evidence supports this conventional view and finds it does not. We then examine an alternative hypothesis: this turning point occurs around 1970 when the UK joined the European Community. We find strong econometric support for this view. The intuition we offer is that EU membership signalled the prominence of business groups that chose to compete at the high-tech end of the common European market against those business groups that preferred comparative advantage driven Commonwealth markets (mostly former colonies). Those pro-Europe business groups later become the constituency that provides support for Mrs Thatcher's reforms. Without this vital support, we argue, Mrs Thatcher's structural reforms would not have been nearly as effective, if proposed and implemented at all.
    Keywords: European integration; UK relative economic performance
    JEL: N14 O47
    Date: 2017–02
  17. By: Konstantinos Kougias
    Abstract: A renewed discussion has triggered on if and how flexicurity strategies could tackle the explosion of unemployment, increasing poverty rates, and precarious employment. Do flexicurity policies withstand during crisis times and shelter labor markets from shocks? Are the ongoing reforms being characterized by the well-balanced development of both flexibility and security? The paper attempts to investigate the implementation of flexicurity policies as a labor market tool during the years of crisis in different flexicurity regimes. The study will focus its attention on employment policies adopted in Denmark which is considered as one of the two birthplaces of flexicurity concept and Greece which is one of the countries that has been hit the worst by the crisis.
    Keywords: crisis; Denmark; employment; flexicurity; Greece
    JEL: N0
    Date: 2017–01
  18. By: Garbinti, Bertrand; Goupille-Lebret, Jonathan; Piketty, Thomas
    Abstract: This paper combines different sources and methods (income tax data, inheritance registers, national accounts, wealth surveys) in order to deliver consistent, unified wealth distribution series by percentiles for France over the 1800-2014 period, with detailed breakdowns by age, gender, income and assets over the 1970-2014 sub-period. We find a large decline of the top 10% wealth share from the 1910s to the 1980s (from 80-90% of total wealth during the 19th century up until World War 1, down to 50-60% in the 1980s), mostly to the benefit of the middle 40% of the distribution (the bottom 50% wealth share is always less than 10%). Since the 1980s-90s, we observe a moderate rise of wealth concentration, with large fluctuations due to asset price movements. In effect, rising inequality in saving rates and rates of return pushes toward rising wealth concentration, in spite of the contradictory effect of housing prices. We develop a simple simulation model highlighting how the combination of unequal saving rates, rates of return and labor earnings leads to large multiplicative effects and high steady-state wealth concentration. Small changes in the key parameters appear to matter a lot for long-run inequality. We discuss the conditions under which rising concentration is likely to continue in the coming decades.
    Keywords: saving rate; steady-state; Wealth Inequality
    JEL: D31 E21 N34
    Date: 2017–02
  19. By: Ellen R. McGrattan; Andrea Waddle
    Abstract: In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly.
    JEL: F23 F41 O33 O34
    Date: 2017–03
  20. By: Colliard, Jean-Edouard; Hoffmann, Peter
    Abstract: We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our findings show that moderate aggregate effects on market quality can mask large adjustments made by individual agents. JEL Classification: G10, G14, G18, H32
    Keywords: financial transaction tax, high-frequency trading, institutional trading, liquidity
    Date: 2017–02
  21. By: Jorg Bibow
    Abstract: This paper investigates the (lack of any lasting) impact of John Maynard Keynes's General Theory on economic policymaking in Germany. The analysis highlights the interplay between economic history and the history of ideas in shaping policymaking in postwar (West) Germany. The paper argues that Germany learned the wrong lessons from its own history and misread the true sources of its postwar success. Monetary mythology and the Bundesbank, with its distinctive anti-inflationary bias, feature prominently in this collective odyssey. The analysis shows that the crisis of the euro today is largely the consequence of Germany's peculiar anti-Keynesianism.
    Keywords: John Maynard Keynes; Mercantilism; Economic and Monetary Union; Euro Crisis
    JEL: B31 E30 E58 E65 N14
    Date: 2017–03

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