nep-eec New Economics Papers
on European Economics
Issue of 2017‒04‒16
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries By Claudiu Tiberiu Albulescu; Dominique P\'epin; Stephen Miller
  2. Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt? By Peter Spahn
  3. The Effect of Central Bank Liquidity Injections on Bank Credit Supply By Luisa Carpinelli; Matteo Crosignani
  4. The effects of income distribution and fiscal policy on growth, investment and budget balance: the case of Europe By Thomas Obst; Özlem Onaran; Maria Nikolaidi
  5. The Economic Impact of East-West Migration on the European Union By Kahanec, Martin; Pytliková, Mariola
  6. International Effects of Euro Area versus US Policy Uncertainty: A FAVAR Approach By Ansgar Belke; Thomas Osowski
  7. What drives the labour wedge? A comparison between CEE countries and the Euro Area By Malgorzata Skibinska
  8. Can Italy grow out of its NPL overhang? A panel threshold analysis By Kamiar Mohaddes; Mehdi Raissi; Anke Weber
  9. Determinants of stock-bond market comovement in the Eurozone under model uncertainty By Skintzi, Vasiliki
  10. Bid-to-cover and yield changes around public debt auctions in the euro area By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
  11. Europe’s role in North Africa: development, investment and migration By Uri Dadush; Maria Demertzis; Guntram B. Wolff

  1. By: Claudiu Tiberiu Albulescu (UPT); Dominique P\'epin (CRIEF); Stephen Miller (WGU Nevada)
    Abstract: This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Date: 2017–04
  2. By: Peter Spahn
    Abstract: We analyze the benefits and costs of a non-euro country opting-in to the banking union. The decision to opt-in depends on the comparison between the assessment of the banking union attractiveness and the robustness of a national safety net. The benefits of opting-in are still only potential and uncertain, while costs are more tangible. Due to treaty constraints, noneuro countries participating in the banking union will not be on equal footing with euro area members. Analysis presented in the paper points out that reducing the weaknesses of the banking union and thus providing incentives for opting-in is not probable in the short term, mainly due to political constraints. Until a fully-fledged banking union with well-capitalized backstops is established it may be optimal for a non-euro country to join the banking union upon the euro adoption. Assessing first experiences with the functioning of the banking union and opt-in countries will be crucial for non-euro countries when deciding whether to opt-in.
    Keywords: currency union, lender of last resort, central bank reserves, central bank budget constraint
    JEL: E5 E6
    Date: 2016–10
  3. By: Luisa Carpinelli; Matteo Crosignani
    Abstract: We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.
    Keywords: Bank Credit Supply ; Bank Wholesale Funding ; Lender of Last Resort ; Unconventional Monetary Policy
    JEL: E50 E58 G21 H63
    Date: 2017–03
  4. By: Thomas Obst; Özlem Onaran (University of Greenwich); Maria Nikolaidi
    Abstract: This paper develops a multi-country post-Kaleckian demand-led growth model that incorporates the role of the government. One novelty of this paper is to integrate cross-country effects of both changes in income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand in EU15 countries. The results show that a policy mix that combines the simultaneous implementation of a pro-labour wage policy, an expansionary fiscal policy and a progressive tax policy in all EU countries leads to a significant rise in the EU15 GDP. The impact of wage policies is positive but small; the overall stimulus becomes much stronger with fiscal expansion. This policy mix leads to an improvement in the budget balance in all the EU15 countries, suggesting that expansionary fiscal policy is sustainable when it is combined with wage and progressive tax policy.
    JEL: E12 E25 E62
    Date: 2017–04
  5. By: Kahanec, Martin; Pytliková, Mariola
    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
  6. By: Ansgar Belke; Thomas Osowski
    Abstract: Building on the growing evidence on the importance of large data sets for empirical macroe-conomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo-Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of na-tional long-term interest rates to an uncertainty shock, our results reveal a strong “North-South” divide within EMU with rates decreasing less significantly in the South. Another im-portant result is that uncertainty shocks emerging in one region quickly raise uncertainty out-side the region of origin which appears to be an important transmission channel of uncertainty.
    Keywords: Economic policy uncertainty, Europe, FAVAR analysis, large-scale econometric models, option value of waiting, uncertainty effects, international uncertainty spillovers, United States
    JEL: C32 F42 D80
    Date: 2017–03
  7. By: Malgorzata Skibinska
    Abstract: The standard frictionless real business cycle model assumes that the wage should be equal to the firms’ marginal product of labour and the households’ marginal rate of substitution . However, the data indicates that this relationship does not hold and that the labour wedge, defined as a gap between these two objects, is characterized by large cyclical variations. This paper aims to identify the factors which might contribute to the differences in the volatilities of the labour wedge across CEE region and the EA. We look at the labour wedge through the lens of a small open economy real business cycle model with search and matching frictions on the labour market. The constructed model is estimated with Bayesian methods separately for Poland, the Czech Republic and the Euro Area and used to decompose variance of the labour wedge and perform some counterfactual simulations. Firstly, we show that the forces driving the labour wedge volatility differ across the analysed economies. While the dynamics of the gap between MRS and MPL in Poland can be attributed mainly to labour market disturbances, the consumption preference shock is the main force behind the wedge variability in the Euro Area and the Czech Republic. The bigger role of the labour market disturbances in Poland may suggest that the labour market in this country functions less smoothly, with negative consequences for welfare. Secondly, our results indicate that the differences in volatilities of the labour wedge in the analysed economies result primarily from the distinct characteristics of stochastic disturbances. However, in Poland the labour market structure also plays some role in explaining the differences vis-à-vis the EA. More precisely, lower, as compared to the Eurozone, elasticity of the matching function with respect to unemployment and higher workers’ bargaining power raise the volatility of the labour wedge in this country. The impact of heterogeneity in these parameters between the EA and the Czech Republic is rather marginal. All in all, we find heterogeneity in the labour wedge fluctuations within the CEE region. The Czech Republic seems to resemble more the EA in terms of both wedge volatility and its driving forces. Our results suggest that the labour market frictions in Poland are relatively more severe and generate fluctuations that are more harmful for social welfare.
    Keywords: Poland, Czech Republic, Euro Area, Labor market issues, Business cycles
    Date: 2016–07–04
  8. By: Kamiar Mohaddes; Mehdi Raissi; Anke Weber
    Abstract: This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term.
    Keywords: Italy, non-performing loans, real output growth, panel tests of threshold effects
    JEL: C23 E44 G33
    Date: 2017–04
  9. By: Skintzi, Vasiliki
    Abstract: This paper examines the dynamic relationship between stock and bond returns in eleven Eurozone countries during the last seventeen years. The literature so far reports heterogeneous results with respect to the important determinants of the stock-bond relationship. To deal with model uncertainty we employ a Bayesian model averaging technique and examine various macroeconomic and financial variables which are likely to influence stock-bond comovement. Bond and stock market uncertainty, interest rate, inflation and state of the economy are important determinants of cross-asset correlations. Divergence in the dynamic patterns of stock-bond comovement as well as on the effect of economic variables on this comovement is reported during crisis periods and between different European regions. Our results are of high relevance for investment strategies as well as for policy decisions in the European context.
    Keywords: stock-bond correlation, Bayesian Model Averaging, financial crisis
    JEL: C11 C58 E44 G15
    Date: 2017–04–13
  10. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
    Abstract: Earlier research has shown that euro-area primary public debt markets affect secondary markets. We find that more successful auctions of euro area public debt, as captured by higher bid-to-cover ratios, lead to lower secondary-market yields following the auctions. This effect is stronger when market volatility is higher. We rationalize both findings using a simple theoretical model of primary dealer behavior, in which the primary dealers receive a signal about the value of the asset auctioned.
    Keywords: bid-to-cover ratios; primary and secondary markets; primary dealers; public debt auctions; volatility
    JEL: G11 G12 G14 G18
    Date: 2017–03
  11. By: Uri Dadush; Maria Demertzis; Guntram B. Wolff
    Abstract: This paper was prepared for, and presented at, the informal ECOFIN meeting of EU finance ministers in Malta on 8 April 2017, with the title Boosting private investment in North Africa and beyond - what role for European Institutions? Africa’s population is projected to reach almost 2.5 billion by 2050. Migration from Africa to the EU is relatively stable, at around 500,000 migrants per year, or 0.1 percent of the EU population, yet irregular immigration into the EU has increased recently. Development is often seen as the way to reduce migration but the development-migration nexus is complex. At low levels of development, migration might increase with rising GDP per capita. This applies to most of sub-Saharan Africa. By contrast, North African countries are among the continent’s more developed economies. Their geographical positions make them natural partners for the EU. The region is diverse but political instability has been a common feature that in recent years has hindered economic development. Cyclical factors and deep-rooted structural weaknesses have also contributed to weak economic performance. Conditions for business are relatively poor and trade barriers in some sectors have prevented integration either between these countries or into global value chains. The authors of this Policy Contribution propose five ways in which EU policymakers can contribute to development in North Africa and build partnerships on trade, investment and migration.
    Date: 2017–04

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