nep-eec New Economics Papers
on European Economics
Issue of 2017‒04‒30
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area By Loes Verstegen; Lex Meijdam
  2. Long Term Growth Perspectives in Japan and the Euro Area By Christian Dreger
  3. Quarterly Report on the Euro Area (QREA), Vol.15, No.3 (2016) By Erik Canton; Nicolas Carnot; Ulrich Clemens; Martin Larch; Philipp Mohl; Nigel Nagarajan; Adriana Reut; Borek Vasicek; Melanie Ward-Warmedinger
  4. Quarterly Report on the Euro Area (QREA), Vol.16, No.1 (2017) By Katia Berti; Benat Bilbao-Osorio; Gaetano D’Adamo; Christian Engelen; Christoph Maier; Diana Ognyanova; Anna Thum-Thysen; Borek Vasicek; Peter Voigt
  5. Disentangling Goods, Labor, and Credit Market Frictions in Three European Economies By Thomas Brzustowski; Nicolas Petrovsky-Nadeau; Etienne Wasmer
  6. Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results By M. Bussière; L. Ferrara; M. Juillard; D. Siena
  7. Money and Credit Overhang in the Euro Area By J. Liu; C.J.M. Kool
  8. Using bank loans as collateral in Europe : The role of liquidity and funding purposes By François Koulischer; Patrick Van Roy
  9. Forward guidance through interest rate projections: does it work? By Leif Brubakk; Saskia ter Ellen; Hong Xu
  10. The Costs and Benefits of Leaving the EU: Trade Effects By Swati Dhingra; Hanwei Huang; Gianmarco I. P. Ottaviano; Joao Paulo Pessoa; Thomas Sampson; John Van Reenen
  11. The interest rate pass-through in the low interest rate environment: Evidence from Germany By Hennecke, Peter
  12. The German labor market in the Great Recession: Shocks and institutions By Gehrke, Britta; Lechthaler, Wolfgang; Merkl, Christian
  13. The Nordic model of economic development: Shocks, reforms and future prospects By Iacono, Roberto

  1. By: Loes Verstegen; Lex Meijdam
    Abstract: In this paper, we incorporate a transfer mechanism into a DSGE model with a rich fiscal sector to assess the effectiveness of fiscal transfers for a monetary union, in particular for the Economic and Monetary Union. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The results show that the transfer mechanism is effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes.
    Keywords: Economic and Monetary Union of Europe, General equilibrium modeling, Public finance
    Date: 2016–07–04
  2. By: Christian Dreger
    Abstract: Euro area countries and Japan are confronted with similar challenges. Potential output is on a falling trend in the euro area, and the decrease started well before the financial crisis. In Japan, low output growth is a striking feature since many years, despite the unconventional monetary policy stance and massive fiscal stimulus programs provided by the government. According to a growth accounting exercise based on a Cobb-Douglas production function, the development in both economies can be traced to a weak evolution of TFP. Weak capital deepening is detected especially in the euro area. Driven by high uncertainty with regard to the business cycle, the willingness of firms to undertake investment is only modest and constitutes the achilles heel for a smooth recovery. Both economies are not well prepared to manage the demographic challenges caused by an elderly population. Given that debt-to-GDP ratios are already at record heights, the scope for further demand driven policies is rather limited, especially in Japan. Instead, structural reforms are on the agenda to promote long run growth and a smooth development of the global economy.
    Keywords: Long run growth, government debt, aging population
    JEL: O40 E60 J11
    Date: 2017
  3. By: Erik Canton; Nicolas Carnot; Ulrich Clemens; Martin Larch; Philipp Mohl; Nigel Nagarajan; Adriana Reut; Borek Vasicek; Melanie Ward-Warmedinger
    Abstract: In this edition of the QREA, European Commission staff look at the monetary and fiscal policy mix in the euro area and the challenges policymakers face in the current environment. Ways to strengthen the resilience of euro area Member States are also explored and in another chapter, concerns about market liquidity are investigated.
    Keywords: Convergence, economic resilience, structural reforms, macroeconomic policy mix, financial market liquidity
    JEL: A10 C10 C54 E00 E44 E52 E61 E62 E63 F15 F45 P11
    Date: 2016–12
  4. By: Katia Berti; Benat Bilbao-Osorio; Gaetano D’Adamo; Christian Engelen; Christoph Maier; Diana Ognyanova; Anna Thum-Thysen; Borek Vasicek; Peter Voigt
    Abstract: In this edition of the QREA, European Commission staff looks at the problem of non-performing loans from a macroeconomic perspective. It also looks at ways to unlock investment in intangible assets in Europe and assesses the competitiveness of the euro area from a number of perspectives.
    Keywords: Non-performing loans, investment, intangible assets, competitiveness
    JEL: A10 C10 C54 E00 E22 E44 F14 F15 F36 F45 G20 G21 P11
    Date: 2017–03
  5. By: Thomas Brzustowski (London School of Economics and Political Science (LSE)); Nicolas Petrovsky-Nadeau (Tepper School of Business); Etienne Wasmer (Département d'économie)
    Abstract: We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In these three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of the total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: most variation in unemployment comes from the speed of matching in the labor market.
    Keywords: Search; Matching; Financial frictions; Goods frictions
    Date: 2016
  6. By: M. Bussière; L. Ferrara; M. Juillard; D. Siena
    Abstract: This paper focuses on growth enhancing budget-neutral fiscal reforms, i.e. changes in the composition of government revenues and spending that stimulate GDP growth while keeping the ratio of the fiscal budget to GDP constant. To this aim, we present simulation results using a multi-country DSGE model with three large economic regions, the US, the euro area and the rest of the world. The model features constrained and unconstrained non-Ricardian households and a detailed government sector; its multi-country nature allows investigating cross-country spillovers. The paper focuses on the most growth-friendly budget-neutral fiscal measures: (i) an incomplete fiscal devaluation (ii) a rise in government investment compensated by a fall in government consumption and (iii) a rise in government investment compensated by a rise in consumption and labor taxes. Dampening or amplifying effects due to coordination across policies (monetary and fiscal) and across economic regions are also considered. Three main results stand out. First, an increase in government investment financed by rising less distortionary taxes appears to be an effective growth-friendly budget-neutral reform in the sense that it generates both short- and long-run GDP growth and improves fiscal sustainability. Second, benefits and costs of budget-neutral reforms are not equally distributed across agents, giving rise to a policy trade-off between growth and distributional consequences. Third, budget-neutral reforms do not have large cross-border trade spillovers; however, reforms coordinated across all countries in periods of accommodative monetary policy do have amplified domestic effects.
    Keywords: Fiscal composition, budget-neutral reforms, taxes, government spending, multi-country DSGE model, international spillovers.
    JEL: E62 E63 F42
    Date: 2017
  7. By: J. Liu; C.J.M. Kool
    Abstract: In this paper, we employ panel co-integration techniques to identify and estimate homogeneous long-run equilibrium relations for money and credit for 10 euro area countries. Over the period 1999-2013, we do find evidence of such long-run relations when accounting for a structural break in 2008. While money and credit follow similar long run trends, the short and medium term relation between money and credit overhang is weak, throwing doubt on the hypothesis that money creating potential drives credit booms. Especially in current account deficit countries, we observe a sizable build-up of credit overhang prior to 2008. Positive (negative) credit overhang is strongly related to net foreign borrowing (lending).
    Keywords: macro-economic imbalances, net foreign credit, Panel co-integration
    Date: 2017–02
  8. By: François Koulischer (Banque centrale du Luxembourg); Patrick Van Roy (NBB, Prudential Policy and Financial Stability, and Université libre de Bruxelles)
    Abstract: We show that illiquid assets such as bank loans are used by euro area banks both as central bank collateral for short-term liquidity insurance purposes and for longer-term funding purposes for issuing covered bonds or asset-backed securities. We then explore the determinants of the choice of using bank loans for short-term liquidity insurance purposes or long-term funding purposes focusing on the case of Belgian banks. We find that (1) loan types are key to alleviating asymmetries of information; (2) regulatory requirements play a major role in the choices of banks, both directly and indirectly through clientele effects and (3) there are significant switching costs between the various uses of bank loans as collateral so historical decisions also determine the use of bank loans as collateral.
    Keywords: Collateral, securitisation, bank loans, liquidity
    JEL: E52 E58 G01 F36
    Date: 2017–04
  9. By: Leif Brubakk (Norges Bank (Central Bank of Norway)); Saskia ter Ellen (Norges Bank (Central Bank of Norway)); Hong Xu (Norges Bank (Central Bank of Norway))
    Abstract: Based on high-frequency data for Norway and Sweden, we investigate to what extent explicit forward guidance from monetary policy makers, by means of publishing the path of expected future policy rates, affects the market yield curve. We summarise movements in the yield curve by two latent factors (the 'target factor' and 'market path factor'), which capture market participants' assessment of all relevant monetary policy communication made available on announcement days. We then show that information contained in the published interest rate path has a signi cant effect on the market path, and can explain up to 47% of the market path factor. Hence, we conclude that 'explicit' forward guidance in the form of publishing the interest rate path succeeds in moving markets in the desired direction. Furthermore, our results show that central bank and market revisions of interest rate expectations are strongly correlated. This suggests that market participants to a large extent understand the monetary policy reaction pattern.
    Keywords: monetary policy, forward guidance, interest rates
    JEL: E43 E44 E52 E58 G12
    Date: 2017–04–19
  10. By: Swati Dhingra; Hanwei Huang; Gianmarco I. P. Ottaviano; Joao Paulo Pessoa; Thomas Sampson; John Van Reenen
    Abstract: This paper estimates the welfare effects of Brexit, focusing on trade and fiscal transfers. We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates, as in Costinot and Rodríguez-Clare (2014). We simulate a range of counterfactuals reflecting alternative options for EU-UK relations following Brexit. Welfare losses for the average UK household are 1:3% if the UK remains in the EU's Single Market like Norway (a "soft Brexit"). Losses rise to 2:7% if the UK trades with the EU under World Trade Organization rules (a "hard Brexit"). A reduced form approach that captures the dynamic effects of Brexit on productivity more than triples these losses and implies a decline in average income per capita of between 6:3% and 9:4%, partly via falls in foreign investment. These negative effects are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.
    Keywords: Trade, Brexit, General equilibrium
    JEL: F13 F15 F17
    Date: 2017–04
  11. By: Hennecke, Peter
    Abstract: In this paper it is shown that the ECB's main refinance rate, measured by various Taylor-rules, is far too low for Germany for over half a decade. That entails risks for the stability of Germany's financial system. How strong these risks materialize depends on the extent to which German banks pass on the low policy rates to their customers. In this paper, the interest rate pass-through in Germany in the low interest era is investigated using error-correction models for various bank interest rates. The results indicate a stronger short-term pass-through as well as diminished interest rate margins that weigh on banks' profits. However, there is no evidence for structural changes in the long-term relationship between policy rates and banks' interest rates. While the latter might be soothing for monetary policy makers, the former is rather a reason for concern.
    Keywords: low interest rates,interest rate pass-through,interest rate channel
    JEL: E43 E58
    Date: 2017
  12. By: Gehrke, Britta (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Lechthaler, Wolfgang; Merkl, Christian
    Abstract: This paper analyzes Germany's unusual labor market experience during the Great Recession. We estimate a general equilibrium model with a detailed labor market block for postunification Germany. This allows us to disentangle the role of institutions (short-time work, government spending rules) and shocks (aggregate, labor market, and policy shocks) and to perform counterfactual exercises. We identify positive labor market performance shocks (likely caused by labor market reforms) as the key driver for the "German labor market miracle" during the Great Recession.
    JEL: E24 E32 E62 J08 J63
    Date: 2017–04–14
  13. By: Iacono, Roberto
    Abstract: The aim of this research is to provide novel evidence regarding the functioning of the Nordic model of economic development and the robustness of its institutions. At first, the paper defines a conceptual analytical framework identifying the key features of the model for the Nordic economies (Denmark, Finland, Norway, and Sweden), by synthesizing relevant background literature. Secondly, this framework is used to interpret a set of shocks, reforms and ongoing trends: the effect of resource revenues on the labor market and income inequality in Norway compared to the other Nordic countries; the design of a novel minimum income scheme in Finland and its effects on preferences for social insurance; and the implications of population ageing and increased automation for indicators of sustainability for the Nordic welfare states.
    Keywords: Nordic model,Income inequality,Welfare states,Ageing,Automation
    JEL: H53 I38 J31 P47 P51
    Date: 2017

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