nep-eec New Economics Papers
on European Economics
Issue of 2017‒07‒23
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Precautionary recapitalisation: time for a review? By Nicolas Véron
  2. Euro area sovereign yields and the power of QE By António Afonso; Mina Kazemi
  3. Cross-Country Spillovers of Fiscal Consolidations in the Euro Area By Tigran Poghosyan
  4. The effects of central bank’s verbal guidance: evidence from the ECB By Maddalena Galardo; Cinzia Guerrieri
  5. The Portfolio Rebalancing Effects of the ECB's Asset Purchase Programme By Bua, Giovanna; Dunne, Peter G.
  6. The EAGLE model for Hungary - a global perspective By László Békési; Lorant Kaszab; Szabolcs Szentmihályi
  7. Assessing European business cycles synchronization By Kovačić, Zlatko; Vilotić, Miloš
  8. Middle Class Fortunes in Western Europe By Rakesh Kochhar
  9. Assessing the Sustainability of External Imbalances in the European Union By António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
  10. The stability of tax elasticities over the business cycle in European countries By Melisso Boschi; Stefano d'Addona
  11. Real and financial cycles: estimates using unobserved component models for the Italian economy By Guido Bulligan; Lorenzo Burlon; Davide Delle Monache; Andrea Silvestrini
  12. The Bank of Italy econometric model: an update of the main equations and model elasticities By Guido Bulligan; Fabio Busetti; Michele Caivano; Pietro Cova; Davide Fantino; Alberto Locarno; Lisa Rodano
  13. Is fiscal policy in the euro area Ricardian? By Nikki Panjer; Leo de Haan; Jan Jacobs
  14. The impact of investment in Public Private Partnerships on Public, Private investment and GDP in Portugal By Inácia Pimentel; Miguel St.Aubyn; Nuno Ribeiro
  15. Wealth, Top Incomes and Inequality By Frank Cowell; Brian Nolan; Javier Olivera; Philippe Van Kerm

  1. By: Nicolas Véron
    Abstract: This paper was provided at the request of the European Parliament’s Economic and Monetary Affairs Committee, in advance of the public hearing with the Chair of the Single Resolution Board on 11 July 2017. The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage (here). © European Union, 2017. For helpful feedback on an early draft, the author thanks Alexander Lehmann, André Sapir, Dirk Schoenmaker and Guntram Wolff at Bruegel, and several other experts and stakeholders. The Bank Recovery and Resolution Directive (BRRD) of 2014, together with the initiation of banking union in the euro area, represent a regime change in EU banking sector policy. The BRRD replaces the prior assumption of public reimbursement of a failing bank’s claimants (or bail-out) with one of mandatory burden sharing (or bail-in), thus reinforcing market discipline. The shift of preference from bail-out to bail-in represents major progress for the EU financial sector policy framework, and deserves continued support. Longstanding financial crisis experience suggests, however, that this shift cannot be absolute. The BRRD, accordingly, maintains the possibility of public support through government guarantees and through precautionary recapitalisation, which is the focus of this paper. Keeping open the option of precautionary recapitalisation is justified both by transitional considerations, as offering flexibility on the long and treacherous path towards a more complete banking union, and permanent considerations, as an available option for public intervention in dire crisis scenarios such as that experienced in the early autumn of 2008. The conditions set by the BRRD for precautionary recapitalisation are fairly restrictive. They include conditions on the viability and balance sheet testing of the bank in question, the competitive impact, the economic and financial stability environment and general principles that the intervention should be precautionary, temporary and proportionate. There have been only few actual cases of precautionary recapitalisation under the BRRD so far - two Greek banks in late 2015, whose precautionary recapitalisations using ordinary shares and contingent convertible bonds can currently be viewed as broadly successful, and very recently Monte dei Paschi di Siena in Italy. It was also requested by Banca Popolare di Vicenza and Veneto Banca, also in Italy, but not granted, suggesting the conditions for access to precautionary recapitalisation are meaningfully enforced by EU authorities. There is no immediate need for legislative reform of the parts of the BRRD that establish the possibility of precautionary recapitalisation, beyond making corrections to a few words in Article 32 that appear to result from hasty drafting. Implementation practice can be expected to draw lessons from early experience, including the need for an asset quality review as a prerequisite for precautionary recapitalisation in all cases except those where circumstances would make it practically infeasible. The broad review of the BRRD scheduled in 2018 should provide another opportunity to consider any need to amend the legislative basis for precautionary recapitalisation, possibly based on more lessons from practical experience in the meantime.
    Date: 2017–07
  2. By: António Afonso; Mina Kazemi
    Abstract: We assess the determinants of long-term sovereign yield spreads using a panel of 10 Euro area countries over the period 1999.01–2016.07 notably regarding the ECB (standard and non-standard) quantitative easing measures. Our findings indicate that the international risk, the bid-ask spread and real effective exchange rate increased the 10-year sovereign bond yield spreads. Moreover, quantitative easing, notably Longer-term Refinancing Operations (LTROs), Targeted LTROs and the Securities Market Program decreased the yield spreads. Key Words: sovereign bonds, non-conventional monetary policy, panel data
    JEL: C23 E52 G10
    Date: 2017–06
  3. By: Tigran Poghosyan
    Abstract: This paper revisits the issue of cross-country spillovers from fiscal consolidations using an innovative empirical methodology. We find evidence in support of fiscal spillovers in 10 euro area countries. Fiscal consolidation in one country not only reduces domestic output (direct effect), but also the output of other member countries (indirect/spillover effect). Fiscal spillovers are larger for: (i) more closely located and economically integrated countries, and (ii) fiscal shocks originating from relatively larger countries. On average, 1 percent of GDP fiscal consolidation in 10 euro area countries reduces the combined output by 0.6 percent on impact, out of which half is driven by indirect effects from fiscal spillovers. The impact peters out and becomes insignificant over the medium-term. It is largely driven by tax measures, which have a relatively stronger effect on output compared to expenditure measures. The results are robust to alternative measures of bilateral links across countries.
    Date: 2017–06–28
  4. By: Maddalena Galardo (Bank of Italy); Cinzia Guerrieri (LUISS Guido Carli)
    Abstract: In this paper we propose a new indicator of central bank’s verbal guidance, which measures communications about the future based on the frequency of future verbs in monetary policy statements. We consider the press conferences of the European Central Bank as a test case. First, we analyze the main determinants of our index and estimate the unexpected component. Second, we investigate the effects of the identified change in verbal guidance on daily movements in forward money market rates between September 2007 and December 2015. Our results show that financial markets’ expectations on future short-term interest rates react to a communication shock about the future: after controlling for the standard policy rate shock and the announcement of unconventional monetary policies, the effect turns out to be negative and larger for longer horizons. This suggests that verbal guidance has proven to be an effective policy instrument for signalling an accommodative monetary policy stance.
    Keywords: central bank communication, textual analysis, European Central Bank, signalling channel, unconventional monetary policy, event-study analysis
    JEL: E43 E44 E52 E58 E61 G14
    Date: 2017–07
  5. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland)
    Abstract: We explore the transmission of the ECB’s public sector asset purchase programme (PSPP) via the portfolio rebalancing of investment funds and their investors. Evidence for this channel would validate several theoretical propositions and may help in fine tuning the programme. Using dynamic panel methods to identify significant rebalancing, we find that PSPP-holding funds reduce their holdings of government bonds and rebalance towards bonds issued by deposit taking corporations - but only after the scaling-up of purchases in March 2016. Deeper analysis shows that the purchased assets are predominantly issued outside the euro area. Non-PSPP-holding funds also tend to rebalance towards non-EA issued government bonds and those issued by non-financial corporations. We find no evidence of rebalancing towards equities or derivatives. Investment flows are found to be a catalyst for the rebalancing undertaken by funds themselves. Funds with significant redemptions do relatively more rebalancing of their portfolios. Overall, our results suggest that the programme currently operates through purchases of foreign assets. The scaling-up of the operation is closely aligned with the statistical significance of its effects.
    Keywords: Quantitative Easing, Unconventional Monetary Policy, Portfolio Rebalancing.
    JEL: G15 G23 G28
    Date: 2017–06
  6. By: László Békési (Magyar Nemzeti Bank (Central Bank of Hungary)); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Szabolcs Szentmihályi (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper we adopt the Hungarian version of the EAGLE (Euro Area GLobal Economy) model. The version of the EAGLE model used in this paper allows for the high import content of export a typical feature of small open economies such as Hungary. We study the e/ects of four globally important shocks on Hungary: i) a slowdown of the Chinese economy, ii) more restrictive US monetary policy, iii)areductioninoilprices, andiv)more protectionist US trade policy. We found these policies to have non-negligible indirect e/ects (beyond the relatively small direct ones) on Hungary mostly due to the workings of the shock to the eurozone which is our main trade partner.
    Keywords: Multi-country DSGE, price and wage rigidity, EAGLE model, trade matrix, import content of export, local currency pricing, monetary policy shock, consumption preference shock, markup-shock.
    JEL: E12 E13 E52 E58 F11 F41
    Date: 2017
  7. By: Kovačić, Zlatko; Vilotić, Miloš
    Abstract: Objectives: We analyzed the level of economic integration in Europe by analyzing the degree of growth cycle synchronization between 36 countries and its evolution over the past 17 years. Information whether the business cycles in a currency union are synchronized or not is of key importance for policymakers, because lack of synchronization will lead to sub-optimal common monetary policy. The article has three objectives: extend the literature on the business cycles synchronization by using dataset that includes countries that have never been analyzed before, test the robustness of the results to extraction and synchronization measures used and propose new method for assessing evolution of the synchronization over time. Data/methods: Quarterly GDP series from Eurostat database covering period 2000q1-2016q3 were used with two exceptions (industrial productions indexes for Bosnia and Herzegovina and Montenegro). Series were prepared by removing seasonal component using X13-ARIMA procedure. To assess robustness of synchronization tests results to alternative methods of detrending, business cycles were extracted using two filters: Corbae-Ouliaris ideal band filter and double Hodrick-Prescott filter. For assessing synchronization of the business cycles two methods were used: concordance index and cross-correlation function. Rolling cross-correlations at three lags were used to assess evolution of synchronization over time. Conclusions: Both concordance index and cross-correlations indicated that business cycles of most old EU members are synchronized with EU cycle. However, rolling cross-correlations suggested that this synchronization decreased after 2012. Majority of new EU members cycles were weakly or not at all synchronized with EU cycle until 2004/5. After 2004 most of them were synchronized in the same quarter but with greater variations between countries. For most of them after 2010/12 the degree of synchronization dropped significantly. These results are quite robust across the cycles extraction and synchronization measures used.
    Keywords: Business cycles, European Union, synchronization, HP filter, FD filter, concordance index, cross-correlations, rolling cross-correlations
    JEL: C22 E32 O57
    Date: 2017–05–01
  8. By: Rakesh Kochhar
    Abstract: This paper examines the state of the middle classes in the U.S. and 11 countries in Western Europe and how it has changed since 1991. Among Western Europe’s six largest economies, the shares of adults living in middle-income households increased in France, the Netherlands and the United Kingdom from 1991 to 2010, but shrank in Germany, Italy and Spain. France, the Netherlands and the UK also experienced notable growth in disposable household income, but incomes were either stagnant or falling in Germany, Italy and Spain. Ireland stands out as experiencing the most rapid growth in income from 1991 to 2010 and the biggest expansion of the middle class. Overall, the middle-class share fell in seven of the 11 Western European countries examined, mirroring the long-term shrinking of the middle class in the U.S. The decrease in the middle-class share is typically accompanied by a move up into the upper-income tier and a move down into the lower-income tier.
    Keywords: Income distribution,real income,inequality
    Date: 2017–06
  9. By: António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
    Abstract: We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of EU countries using two complementary approaches. First, we employ both time-series and panel-data stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate. Key Words : current account, exports, imports, net foreign assets, unit roots, structural breaks, cointegration, error-correction, cross-sectional dependence.
    JEL: C22 C23 F32 F34 F36 F41
    Date: 2017–06
  10. By: Melisso Boschi; Stefano d'Addona
    Abstract: We estimate short- and long-run tax elasticities that capture the relationship between changes in national income and tax revenue. We show that the short-run tax elasticity changes according to the business cycle. We estimate a two state Markov-switching regression on a novel dataset of tax policy reforms in 15 European countries from 1980 to 2013, showing that the elasticities during booms and recessions are statistically (and often economically) different. The elasticities of (i) indirect taxes, (ii) social contributions, and (iii) corporate income taxes, tend to be larger during recessions. Tax elasticities for personal income tend to be more stable across the regimes. Estimates of long-run elasticities are in line with existing literature.
    Keywords: Tax elasticity, Tax policy discretionary change, Business cycle, European economy, Markov-switching regimes
    JEL: C24 C29 E32 E62 H20 H30
    Date: 2017–07
  11. By: Guido Bulligan (Bank of Italy); Lorenzo Burlon (Bank of Italy); Davide Delle Monache (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: In this paper we examine the empirical features of both the business and financial cycles in Italy. We employ univariate and multivariate trend-cycle decompositions based on unobserved component models. Univariate estimates highlight the different cyclical properties (persistence, duration and amplitude) of real GDP and real credit to the private sector. Multivariate estimates uncover the presence of feedback effects between the real and financial cycles. At the same time, in the most recent period (2015-2016), the multivariate approach highlights a wider output gap than that estimated by the univariate models considered in this paper.
    Keywords: business cycle, financial cycle, unobserved components, model-based filters
    JEL: C32 E32 E44
    Date: 2017–07
  12. By: Guido Bulligan (Bank of Italy); Fabio Busetti (Bank of Italy); Michele Caivano (Bank of Italy); Pietro Cova (Bank of Italy); Davide Fantino (Bank of Italy); Alberto Locarno (Bank of Italy); Lisa Rodano (Bank of Italy)
    Abstract: The Bank of Italy quarterly econometric model (BIQM) is a large-scale ‘semi structural’ macro-econometric model. It tries to strike the right balance between theoretical rigour and statistical fit to the data. This paper provides an update of the features and the properties of the model, focussing on the empirical estimates of its main equations and on the system responses to various shocks; interactions and feedback mechanisms between the financial and the real side of the economy are also illustrated. The BIQM is primarily used to produce macroeconomic forecasts, but it is also employed – in conjunction with other tools – for evaluating the impact of monetary and fiscal policy options and for counterfactual analyses. Examples of the types of macro-economic analyses carried out with the model are provided.
    Keywords: macro-econometric models, Italy, forecasting, policy simulation
    JEL: C30 E10 E17
    Date: 2017–07
  13. By: Nikki Panjer; Leo de Haan; Jan Jacobs
    Abstract: According to the so-called 'fiscal theory of the price level' (FTPL), under a non-Ricardian regime the price level has to adjust to fulfil the government's budget constraint. In contrast, under a Ricardian regime, government balances adjust in order to preserve government solvency. We empirically determine whether a Ricardian or a non-Ricardian regime is more plausible for the euro area, following the research strategy of Canzoneri, Cumby, and Diba (2001). A Vector AutoRegressive (VAR) model for the primary government balance and the government debt is estimated for the period 1980q2-2013q4. Our model uses dummy interaction terms to account for the breaks due to the introduction of the Euro Convergence Criteria (ECC) and the start of the global financial crisis, respectively. No evidence is found in favour of either regime for the pre-ECC period. In the post-ECC period, a Ricardian regime is more plausible. Some evidence points in the direction of a non-Ricardian regime for the period after the start of the financial crisis.
    Keywords: Fiscal Policy; Euro area; Ricardian regime
    JEL: E63 H62 H63
    Date: 2017–07
  14. By: Inácia Pimentel; Miguel St.Aubyn; Nuno Ribeiro
    Abstract: In this paper we test the macroeconomic impact of investment in public-private partnerships, public and private investment in Portugal through a VAR model with four variables: public and private investment, PPP investment and GDP, to the period 1998- 2013. An assessment of crowding-in / crowding-out effects of investment in PPPs is carried out. We also proceed to the calculation of macroeconomic rates of return on investment in PPP, public investment and private investment. The results show that public and private investment has a positive effect in GDP while investment in PPP reduces the Portuguese GDP. In what concerns to crowding-in/crowding-out effects an increase in PPP investment crowds-out both in private and public investment, while public investment presents a crowding-in effect both in private investment and in investment in PPP; and private investment shows the same crowding-in effect both in investment in PPP and in public investment.
    Date: 2017–06
  15. By: Frank Cowell; Brian Nolan; Javier Olivera; Philippe Van Kerm
    Abstract: Although it is heartening to see wealth inequality being taken seriously, key concepts are often muddled, including the distinction between income and wealth, what is included in "wealth", and facts about wealth distributions. This chapter highlights issues that arise in making ideas and facts about wealth inequality precise, and employs newly-available data to take a fresh look at wealth and wealth inequality in a comparative perspective. The composition of wealth is similar across countries, with housing wealth being the key asset. Wealth is considerably more unequally distributed than income, and it is distinctively so in the United States. Extending definitions to include pension wealth however reduces inequality substantially. Analysis also sheds light on life-cycle patterns and the role of inheritance. Discussion of the joint distributions of income and wealth suggests that interactions between increasing top income shares and the concentration of wealth and income from wealth towards the top is critical.
    Keywords: Inequality,Wealth,Income,Households,Inheritance,Top Incomes,Cross national,comparative
    Date: 2017–07

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