nep-eec New Economics Papers
on European Economics
Issue of 2017‒06‒18
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis By J. Barthélemy; V. Bignon; B. Nguyen
  2. The impact of uncertainty on macro variables - An SVAR-based empirical analysis for EU countries By Ansgar Belke; Dominik Kronen
  3. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices" By Imran Hussain Shah; Simón Sosvilla-Rivero
  4. Monetary-fiscal interactions and the euro area's malaise By Jarociński, Marek; Maćkowiak, Bartosz
  5. Decentralization and fiscal performance in Central and Eastern Europe By Makreshanska, Suzana; Petrevski, Goran
  6. The collateral channel of unconventional monetary policy By Giuseppe Ferrero; Michele Loberto; Marcello Miccoli
  7. The effects of financialisation and financial development on investment: evidence from firm-level data in Europe By Daniele Tori; Özlem Onaran
  8. Macroeconomic Implications of Oil Price Fluctuations : A Regime-Switching Framework for the Euro Area By Fédéric Holm-Hadulla; Kirstin Hubrich
  9. Trade and labour adjustment in Europe: What role for the European Globalization Adjustement Fund? By Cernat, Lucian; Mustilli, Federica
  10. Offshoring, industry heterogeneity and employment By Bramucci, Alessandro; Cirillo, Valeria; Evangelista, Rinaldo; Guarascio, Dario
  11. Greece and the Troika – Lessons from international best practice cases of successful price (and wage) adjustment By Ansgar Belke; Daniel Gros
  12. Optimal Adjustment Paths in a Monetary Union By Ansgar Belke; Daniel Gros
  13. Did quantitative easing boost bank lending? The Slovak experience. By Lojschova, Adriana
  14. The Transmission Mechanism of Credit Support Policies in the Euro Area By Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
  15. Les classes moyennes en Europe et en France au sortir de la crise By Pierre Courtioux; Christine Erhel; Daniel Vaughan-Whitehead
  16. Brexit: estimating tariff costs for EU countries in a new trade regime with the UK By Rita Cappariello

  1. By: J. Barthélemy; V. Bignon; B. Nguyen
    Abstract: We assess the effect of accepting illiquid assets as collateral at the central bank on banks’ lending activity. We study the lending activity of the 177 largest banks in the Euro area between 2011m1 and 2014m12 and the composition of their pool of collateral pledged with the Eurosystem. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem increased their lending to non-financial firms and households: a one standard deviation increase in the volume of illiquid collateral increase lending by 0.6%..
    Keywords: collateral, loans, central bank, euro crisis.
    JEL: E52 E58 G01 G21
    Date: 2017
  2. By: Ansgar Belke; Dominik Kronen
    Abstract: In light of the rising political and economic uncertainty in Europe, we aim to provide a basic understanding of the impact of economic policy uncertainty and financial market uncertainty on a set of macroeconomic variables such as production, consumption and investment. In this paper, we apply a structural vector autoregressive (SVAR) model to gain first insights that may help to identify avenues for further research based on non-linear processes. We find that stock market uncertainty shows a fairly consistently negative effect on the real economy in Europe. However, the implications of economic policy uncertainty for Europe and the Euro area in particular are not so straightforward. It seems as if policy uncertainty raises general investment and consumption of long-lived goods in the EMU core countries in order to be prepared to react on different states of the world in the future. What is more, shifts of invest-ment from peripheral to core EMU member countries as safe havens in uncertain times may produce the same empirical pattern.
    Keywords: hysteresis, investment-type decisions, macroeconomic performance under uncertainty, eco-nomic policy uncertainty, financial uncertainty, option value of waiting, SVAR
    JEL: C32 E20 E60
    Date: 2017–08
  3. By: Imran Hussain Shah (Faculty of Humanities & Social Sciences, University of Bath); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.)
    Abstract: We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.
    Keywords: Stock prices; House prices; Inflation targeting; Macroeconomic stabilization; Euro area. JEL classification:C32, D53, E31, E52, E58, G12, 052, R31.
    Date: 2017–05
  4. By: Jarociński, Marek; Maćkowiak, Bartosz
    Abstract: When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB’s objective. JEL Classification: E31, E32, E63
    Keywords: eurobond, fiscal theory of the price level, self-fulfilling expectations, zero lower bound
    Date: 2017–06
  5. By: Makreshanska, Suzana; Petrevski, Goran
    Abstract: The paper provides empirical evidence on the association between decentralization and fiscal performance of the general government on a panel of 11 former transition countries during 1996-2012, controlling for the effects of various demographic, institutional, and macroeconomic variables. Also, for robustness check we make a comparison with a panel of 18 industrialized European economies. The main findings from the empirical investigation suggest that decentralizing government activities in Central and Eastern Europe leads to an increase in the efficiency in the provision of public goods. Also, we show that not only the extent of fiscal decentralization, but the composition of local revenue, too, matters for fiscal discipline. In these regards, providing local governments with higher autonomy in financing their activities by relying more on their “own” tax revenues instead of intergovernmental grants seems to be conducive with fiscal discipline. In contrast to the sample consisting of the former transition economies, we cannot find evidence on the association between decentralization and fiscal discipline in the developed European countries.
    Keywords: Fiscal decentralization, Budget deficits, Central and Eastern Europe, Panel data models
    JEL: H50 H76 H77
    Date: 2016–03–25
  6. By: Giuseppe Ferrero (Bank of Italy); Michele Loberto (Bank of Italy); Marcello Miccoli (Bank of Italy)
    Abstract: We build a general equilibrium model - along the lines of Williamson (2012) - where financial assets can be used as collateral in secured interbank markets to obtain reserves (central bank money). In this framework, frictions in the exchange process give rise to a liquidity premium for assets. An open market operation that provides reserves in exchange for assets decreases the availability of collateral by increasing its liquidity premium (and decreasing its return). The magnitude of the effect depends on assets' pledgeability properties (haircuts). We explore the positive implications of the model shown in the data. Focusing on the period 2009-2014, we analyse the relationship between yields of euro-area government bonds and the relative amount of bonds and central bank reserves held by the euro-area banking sector. We find evidence consistent with our model: yields decrease when reserves increase relative to bonds, with the effect being stronger at lower levels of haircuts. The results are confirmed after several robustness checks.
    Keywords: unconventional monetary policy, secured interbank market, asset prices
    JEL: E43 E58 G12
    Date: 2017–06
  7. By: Daniele Tori (Open University); Özlem Onaran
    Abstract: In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies' size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Furthermore, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies' investment. This finding challenges the common wisdom on 'finance-growth nexus'. Our findings support the 'financialization thesis' that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity.
    Keywords: financialization, financial development, firm-level data, Europe
    JEL: C23 D22 G31
    Date: 2017–06
  8. By: Fédéric Holm-Hadulla; Kirstin Hubrich
    Abstract: We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the 'normal regime', oil price shocks trigger only limited and short-lived adjustments in these variables. In the 'adverse regime', by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterizing the adverse regime. The systematic response of monetary policy works against such second-round effects in the 'adverse regime' but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations -- and inform deliberations on the adequate policy response -- in real-time.
    Keywords: Regime Switching models ; Inflation ; Inflation expectations ; Oil prices ; Time-varying transition probabilities
    JEL: E31 E52 C32
    Date: 2017–06
  9. By: Cernat, Lucian (DG Trade); Mustilli, Federica (DG Trade)
    Abstract: Trade agreements have become a growing source of concerns due to potential job losses that some sectors can incur as a result of increased competition. Although the economic literature shows that the overall results of trade liberalization are positive, some sectors may be adversely affected, leading to job losses and adjustment costs. One instrument designed to deal with such adjustment costs is the European Globalization Adjustment Fund (EGF), established by the European Commission in 2006. By jointly funding with EU Member States active labour market policies, the EGF is a tool that supports workers who lost their jobs due to globalisation. Despite the relevance of the EGF as trade adjustment mechanism, the existing evidence suggests that its use is still limited compared to its potential. The paper tries to review some of the constraining factors identified in the latest mid-term evaluation by the European Commission and suggest several avenues for further improvement.
    Keywords: European Globalization Adjustment Fund (EGF); labour market policies; international trade
    JEL: F16
    Date: 2017–06–12
  10. By: Bramucci, Alessandro; Cirillo, Valeria; Evangelista, Rinaldo; Guarascio, Dario
    Abstract: Economies and production systems are subject to incessant processes of structural change fuelled by the dynamics of demand, technology and international competition. The increasing international fragmentation of production, also known as "offshoring", is an important element of such a (global in scale) process of structural change having important implications for employment and on the way employment gains and losses are distributed across firms, industries, national economies and components of the labour force. This paper assesses the employment impact of offshoring, in five European countries (Germany, Spain, France, Italy and the United Kingdom), distinguishing between different types of inputs/tasks offshored, different types of offshoring industries and types of professional groups affected by offshoring. Results provide a rather heterogeneous picture of both offshoring patterns and their effects on labour, and the presence of significant differences across industries. Along with this variety of employment outcomes, the empirical evidence suggests that offshoring activities are mainly driven by a cost reduction (labour saving) rationale. This is particularly the case for the manufacturing industry where offshoring is found to exert a negative impact among the less qualified (manual) or more routinized (clerks) types of jobs, while the main difference between high- and low-technology industries has to do with the type of labour tasks that are offshored and the types of domestic jobs that are affected. In hightech industries the negative effects of offshoring on employment are concentrated among the most qualified professional groups (managers and clerks). A specular pattern is found in the case of the low-tech industries where job losses are associated to the offshoring of the least innovative stages of production and manual workers are those most penalised.
    Keywords: Offshoring,Technological change,Employment
    JEL: F16 O33 F11
    Date: 2017
  11. By: Ansgar Belke; Daniel Gros
    Abstract: This paper reviews cases of successful price and wage adjustment, which are often regarded as constituting best practice, – Australia, Latvia and the German new states and contrasts them with the Greek experience under the Troika Programs. Latvia stands out as having had the quickest adjustment in wages. By contrast, before the crisis, Greek wages appeared to have been largely insensitive to labour market conditions but this changed with the program. We find that the reaction of wages to unemployment in Greece was under the program similar to that observed in Germany and Portugal (a case, which has attracted less attention). A priori it is likely that the change in wage behaviour in Greece was due to the labour market reforms imposed under the program. But this cannot be proven beyond doubt.
    Keywords: Phillips curves, price and wage adjustment, internal devaluation, Australia, Greece, Latvia, Portugal, West vs. East Germany
    JEL: E31 F49
    Date: 2017–07
  12. By: Ansgar Belke; Daniel Gros
    Abstract: What to do when a country experiences a sudden stop in capital inflows and has to adjust externally? Sticky wages make adjustment to an external imbalance more difficult within a monetary union. Periods of high unemployment are usually necessary to achieve the required real depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute the output and employment cost over time. But a gradual adjustment also implies that current account deficits persist for longer, leading to higher debt, and higher debt-service costs. The optimal path of price and wage adjustment thus involves a trade-off between the pain (unemployment) and the gain (lower debt) from adjustment. A simple model shows the determinants of the optimal path in terms of deeper parameters, such as the slope of the Phillips curve and the degree of openness. The rules for the resolution of future crises within the euro area should take this into account. Gradual adjustment is not always the optimal choice, and sometimes the alternative path of introducing abrupt changes produces the desired results.
    Keywords: Speed of adjustment, openness, Phillips curve, price and wage adjustment, internal devaluation, policy complementarities
    JEL: F41 F45 P11
    Date: 2017–10
  13. By: Lojschova, Adriana
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual bank-level data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–05
  14. By: Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
    Abstract: Using a sample of 131 banks, we Önd that the Eurosystemís credit support policies have been successful in stimulating bank credit to the private sector: the impact was greater on the loan supply of smaller, less liquid, less capitalized banks and those more dependent on wholesale funding. The role of bank capital is, however, ambiguous. Besides the above favorable direct e§ect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity e§ects of these policies. The low capital drag on the other channels has even been dominant during the sample period.
    Date: 2017–06
  15. By: Pierre Courtioux (EDHEC Business School et Centre d'Economie de la Sorbonne); Christine Erhel (Centre d'Economie de la Sorbonne et Centre d'Etudes de l'Emploi et du travail); Daniel Vaughan-Whitehead (Bureau International du Travail)
    Abstract: Within European countries, France belongs to a group of countries (also including Germany, Belgium, Netherlands, Spain) where the share of the middle class in total population stands at a relatively high level. Besides that share appears stable over the last 10 years (as in Belgium and the Netherlands, and contrary to Germany or Sweden where it has been decreasing). Such middle-class resilience during the crisis, and more generally from 1996 to 2001, can be related to three main trends: the stability of the middle-class share within total population, stable inequalities within the middle-class, and a maintained growth in income. However, the French middle-class has been hit by labour market changes. First, the share of managers and professionals has increased in the middle-class, especially in the middle-class higher income group, making that group closer to the higher income class. Second, the development of flexible forms of employment (temporary employment, part-time and involuntary part-time) has been concentrating on middle-class lower income group -and even more on the lower income class. Thus heterogeneity within the middle-class seems to have increased in France despite its overall stability
    Keywords: middle-class; income; France; European Union
    JEL: D3 H2 J3
    Date: 2017–06
  16. By: Rita Cappariello (Bank of Italy)
    Abstract: This study estimates the average tariffs that the producers of each of the 27 EU countries could face when exporting to the UK in the event that a new Free Trade Agreement is not reached as part of the Brexit negotiation and that trade between the EU and the UK is conducted under WTO most-favoured-nation terms. The analysis is based on information from the WTO-IDB database and on bilateral trade flows at the product level published by UN Comtrade. The results show that average tariff costs would be different across EU countries, depending on the initial level of commercial relationships with the UK and on the sectoral composition of trade flows. Different tariff costs may potentially create a strong heterogeneity in the EU economies with regard to their stakes in the negotiations with the UK, and have an impact on the establishment of the EU position, to which each Member State contributes equally.
    Keywords: tariffs, protectionism, Brexit
    JEL: F13 F15
    Date: 2017–06

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