nep-eec New Economics Papers
on European Economics
Issue of 2017‒06‒11
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Smooth Transition Spatial Autoregressive Models By Bo Pieter Johannes Andree; Francisco Blasques; Eric Koomen
  2. Long-term effects of fiscal stimulus and austerity in Europe By Sebastian Gechert; Gustav A. Horn; Christoph Paetz
  3. Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach By Victor Echevarria-Icaza; Simón Sosvilla-Rivero
  4. Charting the next steps for the EU financial supervisory architecture By Nicolas Véron
  5. Macroeconomic Determinants of International Migration to the UK By Forte, Giuseppe; Portes, Jonathan
  6. The Interplay between Εx-post Credit Risk and the Cycles: Evidence from the Italian banks By Anastasiou, Dimitrios
  7. On the seemingly incompleteness of exchange rate pass-through to import prices: Do globalization and/or regional trade matter? By Antonia Lopez-Villavicencio; Valérie Mignon
  8. Internal devaluation in a wage-led economy. The case of Spain By Ignacio Álvarez; Jorge Uxó; Eladio Febrero
  9. The eurozone (expected) inflation: an option’s eyes view. By Ricardo Gimeno; Alfredo Ibáñez
  10. Regulation, institutions and aggregate investment: New evidence from OECD countries By Balázs Égert
  11. Profit rates in the developed capitalist economies: a time series investigation. By Trofimov, Ivan D.
  12. Did Negative Interest Rates Impact Bank Lending? By Phil Molyneux; Rue Xie; John Thornton; Alessio Reghezza
  13. Macroeconomic factors behind financial instability By Jan Behringer; Sabine Stephan; Thomas Theobald
  14. Taxation trends in the European Union: 2016 edition By European Commission
  15. Interest premium and economic growth: the case of CEE By Daniel Baksa; István Konya
  16. Wage Formation, Unemployment and Business Cycle in Latvia By Ginters Buss
  17. Factors of the income inequality in the Baltics: income, policy, demography By Navicke, Jekaterina
  18. When and why do countries break their national fiscal rules? By Reuter, Wolf Heinrich

  1. By: Bo Pieter Johannes Andree (VU Amsterdam and Tinbergen Institute, The Netherlands); Francisco Blasques (VU Amsterdam and Tinbergen Institute, The Netherlands); Eric Koomen (VU Amsterdam, The Netherlands)
    Abstract: This paper introduces a new model for spatial time series in which cross-sectional dependence varies nonlinearly over space by means of smooth transitions. We refer to our model as the Smooth Transition Spatial Autoregressive (ST-SAR). We establish consistency and asymptotic Gaussianity for the MLE under misspecification and provide additional conditions for geometric ergodicity of the model. Simulation results justify the use of limit theory in empirically relevant settings. The model is applied to study spatio-temporal dynamics in two cases that differ in spatial and temporal extent. We study clustering in urban densities in a large number of neighborhoods in the Netherlands over a 10-year period. We pay particular focus to the advantages of the ST-SAR as an alternative to linear spatial models. In our second study, we apply the ST-SAR to monthly long term interest rates of 15 European sovereigns over 25-year period. We develop a strategy to assess financial stability across the Eurozone based on attraction of individual sovereigns toward the common stochastic trend. Our estimates reveal that stability attained a low during the Greek sovereign debt crisis, and that the Eurozone has remained to struggle in attaining stability since the onset of the financial crisis. The results suggest that the European Monetary System has not fully succeeded in aligning the economies of Ireland, Portugal, Italy, Spain, and Greece with the rest of the Eurozone, while attraction between other sovereigns has continued to increase. In our applications linearity of spatial dependence is overwhelmingly rejected in terms of model fit and forecast accuracy, estimates of control variables improve, and residual correlation is better neutralized.
    Keywords: Dynamic panel, Threshold models, Spatial heterogeneity, Spatial autocorrelation, Urban density, Interest Rates, Monetary Stability, Sovereign Debt Crisis
    JEL: C01 R1
    Date: 2017–05–31
  2. By: Sebastian Gechert; Gustav A. Horn; Christoph Paetz
    Abstract: We analyze whether there are negative (positive) long-term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh (2013) and Fatás and Summers (2016) and using a novel dataset of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find strong and persistent long-run multiplier effects for most European Countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that early stimulus was beneficial even in the long-run, while the subsequent turn to austerity was badly timed and thus not only deepened the crisis but caused evitable hysteresis effects.
    Keywords: Fiscal Consolidation; Fiscal Multipliers; Forecast Errors; Hysteresis
    JEL: E62 H68
    Date: 2017
  3. By: Victor Echevarria-Icaza (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make up and policies in the euro area.
    Keywords: Monetary policy; Spillovers; Euro area crisis.
    Date: 2017
  4. By: Nicolas Véron
    Abstract: This Policy Contribution is a lightly edited version of the written statement submitted by the author to the hearing of the Finance Committee of the German Bundestag on the European System of Financial Supervision, held on 31 May 2017 in Berlin. The combination of banking union and Brexit justifies a reform of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) in the near term, in line with the subsidiarity principle. The other EU-level financial authorities, namely the European Insurance and Occupational Pensions Authority (EIOPA), European Systemic Risk Board (ESRB), Single Resolution Board (SRB) and Single Supervisory Mechanism (SSM), do not immediately require a legislative overhaul. For operational reasons, the October 2017 deadline currently set for the decision on EBA relocation from its current base in London to the EU27 must be respected. In a later phase, the EBA’s governance should also be reviewed to take into account the framework of banking union as is currently in place, including the SRB and SSM. ESMA should be quickly upgraded into a strong and authoritative hub for European Union capital markets supervision and, more generally, financial conduct supervision. This entails a significant overhaul of its governance and funding framework, together with an expansion of its supervisory mandate. The accountability of EBA and ESMA and their scrutiny by the European Parliament should be enhanced as a key element of their governance reform. Further initiatives, including possibly the merger of the SSM, EBA and EIOPA, separation of the SSM from the European Central Bank (ECB), and the folding of the ESRB into the ECB, might be considered in the more distant future, but not in the near term as they would unnecessarily distract from more urgent tasks.
    Date: 2017–06
  5. By: Forte, Giuseppe (King's College London); Portes, Jonathan (King's College London)
    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: 2017–05
  6. By: Anastasiou, Dimitrios
    Abstract: The objective of this research is to empirically examine if both credit and business cycle affect the ex-post credit risk (i.e. non-performing loans) in the banking system of Italy. My sample includes 47 Italian banks for the period 1995Q1-2015Q1. The increase in NPLs post-2008 has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in Italy which is one of the countries that has been hit by the financial crisis more than other economies. By employing Fixed Effects, Random Effects and GMM as econometric methodologies I find a positive (negative) association between credit cycle (business cycle) and NPLs. Higher NPLs in Italy are due to adverse macroeconomic conditions (i.e. downward phase of the business cycle) and due to excess credit (i.e. upward phase of the credit cycle). Another important finding is that the Italian NPLs have a symmetric sensitivity between both business and credit cycle. Such findings may be helpful for both senior bank loan officers and policy makers when designing macro-prudential as well as NPL resolution policies.
    Keywords: Non-performing loans; Ex-post credit risk; Business cycle; Credit cycle; Macro-prudential policy; Italian Banks.
    JEL: C23 C51 E3 G0 G1 G2
    Date: 2017–05
  7. By: Antonia Lopez-Villavicencio; Valérie Mignon
    Abstract: This paper assesses the impact of globalization on exchange rate pass-through (ERPT) into import prices in three core eurozone countries. To this end, we consider various indicators of globalization and rely on both aggregated (i.e., country level) and disaggregated (i.e., good level) data. Using quarterly data since 1992, we do not find compelling evidence that global factors cause a structural change in the degree of exchange rate pass-through. Indeed, increased trade openness or lower trade tariffs push up ERPT in some sectors, though results are quite sparse. However, regionalization, defined as a higher proportion of intra-EU imports' share in total imports, reduces the pass-through in a more generalized way. Most importantly, we show that ERPT incompleteness generally observed in the literature is in appearance only and not at play when intra-EU trade is controlled for. Overall, our findings show that ERPT is complete and significant in numerous sectors, meaning that exchange rate changes still exert important pressure on domestic prices.
    Keywords: Exchange rate pass-through;Import prices;Globalization;Eurozone
    JEL: E31 F31 F4 C22
    Date: 2017–06
  8. By: Ignacio Álvarez (Departamento de Estructura Económica y Economía del Desarrollo, Universidad Autónoma de Madrid. Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Jorge Uxó (Departamento de Análisis Económico y Finanzas, Universidad de Castilla – La Mancha. Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Eladio Febrero (Departamento de Análisis Económico y Finanzas, Universidad de Castilla – La Mancha. Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: The aim of this paper is to use the theoretical distinction between wage-led and profit-led economies to consider the impact of internal devaluation policy on GDP growth for the case of Spain. We assess to what extent wage devaluation in Spain has proven useful vis-à-vis triggering an exportled strategy, boosting aggregate demand and overcoming the crisis. For said purpose, we estimate a Bhaduri-Marglin model drawing on quarterly data from Eurostat, and we expand the traditional model to take into account the effect of private debt on consumption and investment. Our main conclusion is that the Spanish economy can be characterized as a wage-led economy, and that therefore a wage share decrease proves counterproductive to growth. According to our calculations, internal devaluation policy detracted an average of 0.3 percentage points of annual economic growth during the period 2010-2016.
    Keywords: Distribution; Demand; Wage share; Bhaduri-Marglin model; Debt
    Date: 2017
  9. By: Ricardo Gimeno (Banco de España); Alfredo Ibáñez (Instituto tecnológico autónomo de Mexico)
    Abstract: We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Renancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions)
    Keywords: inflation compensation, inflation options, risk-neutral densities, inflation risk aversion, balance of inflation risks
    JEL: E31 E44 G13
    Date: 2017–06
  10. By: Balázs Égert (OECD)
    Abstract: This paper investigates the relationship linking investment (capital stock) and structural policies. Using a panel of 32 OECD countries from 1985 to 2013, we show that more stringent product and labour market regulations are associated with less investment (lower capital stock). The paper also sheds light on the existence of non-linear effects of product and labour market regulation on the capital stock. Several alternative testing methods show that the negative influence of product and labour market regulation is considerably stronger at higher levels. The paper uncovers important policy interactions between product and labour market policies. Higher levels of product market regulations (covering state control, barriers to entrepreneurship and barriers to trade and investment) tend to amplify the negative relationships between product and labour market regulations and the capital stock. Equally important is the finding that the rule of law and the quality of (legal) institutions alters the overall impact of regulations on capital deepening: better institutions reduce the negative effect of more stringent product and labour market regulations on the capital stock, possibly through the reduction of uncertainty as regards the protection of property rights.
    Keywords: aggregate investment, capital deepening, labour market regulation, product market regulation, structural policy
    JEL: A23 C13 C51 E24 L43 L51
    Date: 2017–06–08
  11. By: Trofimov, Ivan D.
    Abstract: This paper examines whether there is empirical evidence to support the hypothesis of secular decline in the economy-wide profit rates as predicted by classical economic theories. We specifically consider profit rates in the OECD economies based on the national accounts data contained in the Extended Penn World Table database. In our analysis we use linear trend, Augmented Dickey-Fuller (ADF) tests, and also allow for structural breaks and instabilities in the series. Results suggest that profit rates in OECD economies exhibited a wide variety of patterns, including stochastic and deterministic trends, random walk, reversals, as well as stability. Secular decline (fluctuation around falling deterministic trend) hypothesis is supported for Canada, Portugal and the USA, while secular rise is witnessed for Greece and Norway.
    Keywords: Profit rate, autoregressive model, structural breaks, trend.
    JEL: B50 C22 P17
    Date: 2017–06–05
  12. By: Phil Molyneux (Bangor University); Rue Xie (Bangor University); John Thornton (Bangor University); Alessio Reghezza (Bangor University)
    Abstract: Since 2012 several central banks have introduced a negative interest rate policy (NIRP) aimed at boosting real spending by facilitating an increase in the supply and demand for bank loans. We employ a bank-level dataset comprising 16,675 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology to analyze whether NIRP resulted in a change in bank lending in NIRP-adopter countries compared to those that did not adopt the policy. Our results suggest that following the introduction of negative interest rates, bank lending was weaker in NIRP-adopter countries than in countries that did not adopt the policy. The result is robust to a wide range of checks. This adverse NIRP effect appears to have been stronger for banks that were smaller, more dependent on retail deposit funding, less well capitalized, had business models reliant on interest income, and operate in more competitive markets. NIRP also appears to have canceled out the stimulus impact of other forms of unconventional monetary policy
    Keywords: Negative interest rates, monetary policy transmission, bank lending, difference in differences estimation
    JEL: E43 E44 E52 G21 F34
    Date: 2017–05
  13. By: Jan Behringer; Sabine Stephan; Thomas Theobald
    Abstract: We investigate the interaction between inequality, leverage and financial crises using bivariate Granger causality tests for a sample of 13 European countries and the United States over the period 1975-2013. We also examine the relevance of other determinants of expansions in credit to income and test whether the causal relationships are sensitive to different measures of credit. We find that top income shares significantly affect future credit to income of the private household sector. The test statistics reveal that the effect of top income shares is weaker for bank credit to the private non-financial sector. This is broadly consistent with the notion, that rising (top-end) personal inequality may lead to an increase in demand for credit by low and middle income households in order to maintain their relative standards of consumption. While results suggest no robust causality relationship from the Gini coefficient to credit, there is evidence for feedback effects from credit to the income distribution. Moreover, we find bidirectional causality relationships between economic activity and credit on the one hand and asset prices and credit on the other which may give rise to mutually reinforcing boom-bust cycles. The monetary policy stance does not seem to be a strong driver of the expansion in credit to income and financial deregulation affects the expansion in credit to income only at the individual country level.
    Keywords: income distribution, credit, financial crises, Granger causality tests
    JEL: C32 C33 E51 G01
    Date: 2017
  14. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA95 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2016–12
  15. By: Daniel Baksa (Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University); István Konya (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University)
    Abstract: This paper views the growth and convergence process of the four Visegrad economies - the Czech Republic, Hungary, Poland and Slovakia - through the lens of the open economy, stochastic neoclassical growth model. We use a unified framework to understand both the long-run convergence path and fluctuations around it. Our empirical exercise highlights both the role of initial conditions such as indebtedness and capital intensity, and random shocks in the growth process. In particular, we explore the importance of the external interest rate premium, and its role in driving investment and the trade balance.
    Keywords: stochastic growth, technology shocks, interest premium, small open economy, Bayesian estimation
    JEL: E13 O11 O41 O47
    Date: 2017–04
  16. By: Ginters Buss (Bank of Latvia)
    Abstract: This paper integrates the alternating-offer wage bargaining (AOB) in a fully-fledged New Keynesian open economy model, and estimates it to the Latvian data. Further on, the paper studies the model's properties and compares them to alternative specifications for labour market modelling, i.e. the Nash wage bargaining with both Taylor-type wage rigidity and without exogenously imposed wage inertia, a reduced-form sharing rule, and a reduced-form wage rule. The goal of the paper is to choose a labour market modelling specification that suits best the needs of the central bank of Latvia in terms of macroeconomic modelling and forecasting. The results indicate that the AOB model suits the Latvian labour market well. The paper concludes with a simulation of economic effects from a permanent increase in the minimum-to-average wage ratio, as observed in Latvia, and finds potentially large losses of employment and output.
    Keywords: alternating-offer bargaining, DSGE model, forecasting, minimum wage
    JEL: E0 E2 E3 F4
    Date: 2017–05–25
  17. By: Navicke, Jekaterina
    Abstract: This paper aims to disentangle the driving factors behind the changes in income inequality in the Baltics since the EU accession, distinguishing between primary income effect, discrete changes in tax-benefit policies and demographic effect. Evaluation of the three effects was based on counterfactual scenarios, which were constructed using taxbenefit microsimulation and re-weighting techniques. Decomposition of the total change in inequality showed that income and policy effects are dominant in the Baltics. Policy effects were inequality reducing before the crisis and for the period after the EU accession as a whole. Income effects were inequality increasing before the crisis and as a whole. Despite rapid demographic changes in the Baltics, the demographic effects on income inequality were marginal and in general inequality-increasing.
    Date: 2017–05–31
  18. By: Reuter, Wolf Heinrich
    Abstract: This paper identifies determinants of compliance with various types of national numerical fiscal rules. Based on 51 fiscal rules in 20 EU member states from 1995 to 2015, the analysis identifies determinants among specific rule characteristics and their fiscal frameworks, as well as their political, (socio-)economic and supranational environments. While the average compliance across all rules and countries is around 50%, compliance with rules constraining stock (rather than flow) variables, set out in coalitional agreements, as well as rules covering larger parts of general government finances is significantly higher. Furthermore, independent monitoring and enforcement bodies (issuing real-time alerts) turn out to be significantly associated with a higher probability of compliance. Several theories of the deficit bias of governments due to government fragmentation, decentralization and political budget cycles are also significant with regards to compliance with fiscal rules. However, neither the economic environment or business cycle, nor forecast errors (except for an unexpectedly higher primary balance) on average seem to play a significant role.
    Keywords: National Numerical Fiscal Rules,Compliance,Fiscal institutions,Deficit Bias
    JEL: E62 H60 H11
    Date: 2017

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