nep-eec New Economics Papers
on European Economics
Issue of 2017‒05‒28
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. On domestic demand and export performance in the euro area countries: Does export concentration matter? By Paulo Soares Esteves; Elvira Prades
  2. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Orphanides, Athanasios
  3. Exchange Rate Regimes in Central, Eastern and Southeastern Europe; A Euro Bloc and a Dollar Bloc? By Slavi T Slavov
  4. Do we want these two to tango? On zombie firms and stressed banks in Europe By Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
  5. The Influence of Brexit on the Foreign Direct Investment Projects and Inflows in the United Kingdom By Simionescu, Mihaela
  6. Macroeconomic Determinants of International Migration to the UK By Forte, Giuseppe; Portes, Jonathan
  7. The long-run impact of monetary policy uncertainty and banking stability on inward FDI in EU countries By Claudiu Albulescu; Adrian Ionescu
  8. Estimating non-financial assets by institutional sector for the euro area By Hofmeister, Zlatina; der Helm, Ruben van

  1. By: Paulo Soares Esteves (Banco de portugal); Elvira Prades (Banco de España)
    Abstract: During economic downturns, weak domestic demand developments seem to be an additional driver of exports, as firms increase their efforts to serve markets abroad to compensate the fall in domestic sales. This may constitute an additional mechanism adjustment for the euro area countries where real exchange rate variations are limited by the common currency itself and the present low inflation environment. However, this substitution effect between domestic and foreign sales could be different across euro area members. This paper uses panel data techniques to assess the role of the export structure in explaining these differences. Building a novel indicator for product concentration, the results suggest that domestic demand developments are more relevant to explain exports in countries with a lower product concentration index (that is, more diversified exports). This contributes to explain why euro area countries under stress registered different economic performance during the most recent years.
    Keywords: exports, domestic demand pressures, external adjustment
    JEL: C22 E03 F10
    Date: 2017–05
  2. By: Orphanides, Athanasios
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the "safe asset" status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longer-term prospects for the euro area.
    Keywords: collateral eligibility; credit risk.; ECB; Euro crisis; loss sharing; Quantitative easing; redenomination risk; safe assets; Sovereign debt; zero lower bound
    JEL: E52 E58 E61 E62 G01
    Date: 2017–05
  3. By: Slavi T Slavov
    Abstract: There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The paper shows that the extent to which each country’s currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the EUR or USD to an extent which appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the countries in the CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation of eventually joining the Euro Area.
    Keywords: Foreign exchange;United States;Western Hemisphere;Central, Eastern and Southeastern Europe; exchange rate regimes; fixed versus floating; de jure versus de facto, Eastern and Southeastern Europe, exchange rate regimes, fixed versus floating, de jure versus de facto, International Monetary Arrangements and Institutions
    Date: 2017–03–31
  4. By: Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
    Abstract: We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that 'zombie' firms generally continued to lever up during the 2010-2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.
    Keywords: zombie lending,debt overhang,bank stress
    JEL: E44 G21 G32
    Date: 2017
  5. By: Simionescu, Mihaela
    Abstract: The main purpose of this study is to assess the impact of Brexit on the foreign direct investment (FDI) in the United Kingdom. As a novelty, compare to previous studies from the literature, the research focused on two proxies for FDI: FDI projects with the associated new and safeguarded jobs and FDI inflows as percent of GDP. Moreover, other methods were used to measure the Brexit impact on the FDI: a gravity model approach based on mixed-effects Poisson models and a counterfactual analysis based on differences-to-differences estimators. The main results indicated that the number of FDI projects might decrease after Brexit by 65% till 90%. A higher increase by 97% is expected to the number of new and safeguarded jobs. Even if FDI inflows in the UK significantly increased compared to the rest of OECD countries because of the EU membership, the UK should follow the model of Norway and Iceland after Brexit in order to avoid significant losses in the FDI inflows.
    Keywords: Brexit,foreign direct investment,FDI projects,Poisson model,differences-in-differences estimator
    JEL: C51 C53 F21
    Date: 2017
  6. By: Forte, Giuseppe; Portes, Jonathan
    Abstract: This paper examines the determinants of long-term international migration to the UK; we explore the extent to which migration is driven by macroeconomic variables (GDP per capita, unemployment rate) as well as law and policy (the existence of “free movement” rights for EEA nationals). We find a very large impact from free movement within the EEA. We also find that macroeconomic variables – UK GDP growth and GDP at origin – are significant drivers of migration flows; evidence for the impact of the unemployment rate in countries of origin, or of the exchange rate, however, is weak. We conclude that, while future migration flows will be driven by a number of factors, macroeconomic and otherwise, Brexit and the end of free movement will result in a large fall in immigration from EEA countries to the UK.
    Keywords: Brexit,EU,Immigration,UK
    JEL: F22 J61 J68
    Date: 2017
  7. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Adrian Ionescu (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In the present paper, we assess the long-run relationship between FDI inflows and the financial environment in 16 EU countries. For this purpose, we use a cointegration technique for heterogeneous panels and the FMOLS and DOLS estimators, over the period 2001 to 2015. We show that financial conditions are important for FDI inflows. More precisely, the monetary uncertainty, calculated as the difference between the recorded and the forecasted interest rate values, negatively affects the FDI inflows. In addition, the banking stability, measured through different Z-score specifications, positively influences the foreign investment. However, this result is influenced by the way the Z-score is calculated. We further report a positive relationship between the business cycle and the FDI entrance. The robustness analyses based on alternative specifications of monetary uncertainty and banking stability confirm our findings. These results are also supported by a PMG estimation. Therefore, authorities must pay special attention to monetary policy predictability and to banking stability in order to facilitate the investors' access to finance and their investment decision.
    Keywords: cointegration, EU countries,FDI inflows, monetary uncertainty, banking stability, Z-score
    Date: 2017–02–01
  8. By: Hofmeister, Zlatina; der Helm, Ruben van
    Abstract: Official euro area-wide statistics on the capital stock and its breakdowns by asset type and sector are not yet available, but would be very useful for economic and financial stability analysis. This paper proposes a constrained optimisation model with the help of which a full cross-sector classification of the capital stock by non-financial asset type can be estimated. The model is applied for the estimation of the capital stock by institutional sector, including households’ non-financial asset types and housing wealth, both for the euro area as a whole and for euro area countries currently not estimating and/or publishing such data. JEL Classification: C33, C82, E02, E22
    Keywords: capital stock, constrained optimisation, euro area, households’ housing wealth, institutional sector, Perpetual Inventory Method
    Date: 2017–05

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