nep-eec New Economics Papers
on European Economics
Issue of 2017‒03‒19
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal Politics in the Euro Area By Luc Eyraud; Vitor Gaspar; Tigran Poghosyan
  2. Internal Devaluation and Labor Market Outcomes: Evidence from Latvia By H. Lehmann; T. Razzolini; A. Zaiceva
  3. Investigating First-Stage Exchange Rate Pass-Through : Sectoral and Macro Evidence from Euro Area Countries By Christophe RAULT; Nidhaleddine BEN CHEIKH
  4. The Joint Dynamics of U.S. and Euro-area Inflation Rates: Expectations and Time-varying Uncertainty. By O. Grishchenko; S. Mouabbi; J.-P. Renne
  5. A Fresh Look at Potential Output in Central, Eastern, and Southeastern European Countries By Jiri Podpiera; Faezeh Raei; Ara Stepanyan
  6. A comprehensive evaluation of macroeconomic forecasting methods By Andrea Carriero; Galvao, Ana Beatriz; Kapetanios, George
  7. Credit Misallocation During the European Financial Crisis By Schivardi, Fabiano; Sette, Enrico; Tabellini, Guido
  8. Countercyclical Capital Regulation in a Small Open Economy DSGE Model By Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
  9. A real-time analysis on the importance of hard and soft data for nowcasting German GDP By Heinisch, Katja
  10. The Macroeconomic Effects of Income and Consumption Tax Changes By Anh D.M.Nguyen; Luisanna Onnis; Raffaele Rossi
  11. Who put the holes in the Swiss cheese? Currency crisis under appreciation pressure By Berhold, Kerstin; Stadtmann, Georg

  1. By: Luc Eyraud; Vitor Gaspar; Tigran Poghosyan
    Abstract: This paper provides evidence of fiscal procyclicality, excessive deficits, distorted budget composition and poor compliance with fiscal rules in the euro area. Our analysis relies on real-time data for 19 countries participating in the euro area over 1999–2015. We look for, but do not find, conclusive evidence of bias in procedures in relation to country size. The paper also briefly reviews the literature on political economy factors and policy biases, and offers some reflections on the euro area architecture.
    Keywords: Political economy;Euro Area;Fiscal policy;Fiscal reforms;political economy factors, deficit bias, procyclicality, fiscal rules
    Date: 2017–01–30
  2. By: H. Lehmann; T. Razzolini; A. Zaiceva
    Abstract: This paper analyzes the policy response and labor market adjustment of Latvia, which faced the most severe recession in Europe and globally. Latvia’s adjustment and recovery from the 2008 economic crisis represents “a rare case study”, which “has been an object of intense attention” (Blanchard et al., 2013) as country’s authorities, despite many experts’ recommendations, decided to maintain its currency peg and adjust through fiscal austerity and internal devaluation implementing major structural reforms. Three years later Latvia returned to a positive growth path and in 2014 joined the Euro zone. The main question in the literature is whether this adjustment represents a success story and can provide a lesson for other countries in the Euro area. We provide details on the adjustment in the Latvian labor market employing individual level data over the years 2002 to 2012. We show that with flexible labor markets, weak unions and relatively low employment protection, adjustment takes place predominantly at the extensive margin since it is driven by flows from permanent wage employment to unemployment. Underemployment constitutes another important adjustment channel, while the evidence for informal employment is more mixed. Wage regressions suggest that job mobility is not associated with increased labor productivity during and immediately after the crisis. We also identify groups particularly affected by the crisis and provide suggestions for the right mix of policy interventions.
    JEL: J6 J21 P16
    Date: 2017–03
  3. By: Christophe RAULT; Nidhaleddine BEN CHEIKH
    Date: 2017
  4. By: O. Grishchenko; S. Mouabbi; J.-P. Renne
    Abstract: We use several U.S. and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation with time-varying uncertinty. We obtain survey-consistent distributions of future inflation at any horizon, both in the United States and in the euro area. Our methodology allows us to compute, in closed form, survey-consistent measures of inflation expectations, inflation uncertainty, inflation expectations anchoring, deflation probabilities and U.S. and euro-area inflation co-movements. Our results suggest strong commonalities between inflation dynamics in the two economies.
    Keywords: inflation, surveys of professional forecasters, dynamic factor model with stochastic volatility, term structure of inflation expectations and inflation uncertainty, anchoring of inflation expectations
    JEL: C32 E31 E44
    Date: 2017
  5. By: Jiri Podpiera; Faezeh Raei; Ara Stepanyan
    Abstract: Was the postcrisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods—production function approach, basic multivariate filter, and multivariate filter with financial frictions—to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners’ slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.
    Keywords: Potential output;Central and Eastern Europe;Economic growth;Emerging markets;Cross country analysis;Potential output; Output gap; Emerging Markets
    Date: 2017–02–14
  6. By: Andrea Carriero (Queen Mary University of London); Galvao, Ana Beatriz (University of Warwick); Kapetanios, George (Kings College London)
    Abstract: This paper contributes to the academic literature and the practice of macroeconomic forecasting. Our evaluation compares the performance of four classes of state-of-art forecasting models : Factor-Augmented Distributed Lag (FADL) Models, Mixed Data Sampling (MIDAS) Models, Bayesian Vector Autoregressive (BVAR) Models and a medium-sized Dynamic Stochastic General Equilibrium Model (DSGE). We look at these models to predict output growth and ination with datasets from the US, UK, Euro Area, Germany, France, Italy and Japan. We evaluate the accuracy of point and density forecasts, and compare models with a large set of predictors with models that employ a medium-sized dataset. Our empirical results shed light on how the predictive ability of economic indicators for output growth and ination changes with horizon, on the impact of dataset size on the calibration of density forecasts, and how the choice of the multivariate forecasting model depends on the forecasting horizon.
    Keywords: factor models ; BVAR models ; MIDAS models ; DSGE models ; density forecasts JEL Classification Numbers: C53
    Date: 2016
  7. By: Schivardi, Fabiano (LUISS School of European Political Economy); Sette, Enrico (Bank of Italy); Tabellini, Guido (Bocconi University)
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous influential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: Bank capitalization; zombie lending; capital misallocation
    JEL: D23 E24 G21
    Date: 2017–03–10
  8. By: Lozej, Matija (Central Bank of Ireland); Onorante, Luca; Rannenberg, Ansgar (Central Bank of Ireland)
    Abstract: We assess the macroeconomic performance of different countercyclical capital buffer rules, where regulatory capital responds to deviation from a long-run trend in the credit-to-GDP ratio (the credit gap), in a medium scale DSGE model of the Irish economy. We find that rules based on the credit gap create a trade-off between the stabilisation of fluctuations originating in the housing market (which are attenuated) and stabilisation of fluctuations caused by foreign demand shocks (which are amplified) because the credit gap is not always procyclical. The trade-off disappears if the regulator follows a rule based on house prices instead of the credit gap.
    Keywords: Bank capital, Countercyclical capital regulation, Housing bubbles, boom-and-bust.
    JEL: F41 G21 G28 E32 E44
    Date: 2017–01
  9. By: Heinisch, Katja
    Abstract: In this paper we reexamine the relative role of soft and hard data in terms of short-term GDP forecasting. We employ mixed frequency models (MF-VARS) and real-time data to investigate the relative role of survey data relative to industrial production and orders in Germany. Special emphasis is given to the real-time data flow of surveys, production and orders. Although we find evidence that the forecast characteristics based on real-time and final data releases differ, we see only little impact on the relative forecasting performance of indicator models. However, when it comes to optimally combine soft and hard data, the use of final release data may understate the relative role of survey information.
    JEL: C53 E37 C32
    Date: 2016
  10. By: Anh D.M.Nguyen (Applied Macroeconomic Research Division, Economics Department, Bank of Lithuania); Luisanna Onnis (Department of Economics, University of Sheffield); Raffaele Rossi (Department of Economics, University of Manchester)
    Abstract: Do consumption and income tax changes affect the economy differently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. The effects of consumption tax cuts are modest and not statistically different from zero on GDP and investment and only marginally expansionary on private consumption. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.
    Keywords: fiscal policy, narrative account, consumption taxation, income taxation, Proxy-SVAR
    JEL: E62 H24 H25 H31
    Date: 2017–02
  11. By: Berhold, Kerstin; Stadtmann, Georg
    Abstract: We examine the reasons why the SNB gave up the lower floor of the 1.20 CHF/EUR exchange rate arrangement. Three types of shocks played a role: Exogenous shocks to the autonomous component of money demand, interest rate decreases of the ECB, as well as appreciation expectations. In order to defend these shocks the SNB intervened heavily in the foreign exchange market. This led to an accumulation of reserves of central bank's balance sheet of the size of 80 % of Swiss GDP. Interestingly, the SNB did not lower the interest rate into the negative range during the time period where the peg was in place. Hence, the SNB did not defend the peg "whatever it takes".
    Keywords: Foreign exchange market,Swiss crisis,UIP,Currency crisis
    JEL: E52 E58 E42
    Date: 2017

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