nep-eec New Economics Papers
on European Economics
Issue of 2017‒08‒13
six papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic effects of fiscal policy in the European Union, with particular reference to transition countries By Rilind Kabashi
  2. Sources of the small firm financing premium: evidence from euro area banks By Holton, Sarah; McCann, Fergal
  3. Demand-side economics in times of high debt: The case of the European Union By Köppl-Turyna, Monika; Lorenz, Hanno
  4. The Re-Emerging Privilege of Euro Area Membership By Johannes Wiegand
  5. Consumption responses to a large shock to financial wealth: evidence from Italy By Bottazzi, Renata; Trucchi, Serena; Wakefield, Matthew
  6. Market and disposable top income shares adjusted by national accounts data By Thomas Goda; Santiago Sanchez

  1. By: Rilind Kabashi (National Bank of the Republic of Macedonia)
    Abstract: This study empirically investigates the short- to medium-term effects of fiscal policy on output and other macroeconomic variables in European Union countries between 1995 and 2012, with particular reference to transition countries. It applies Panel Vector Auto Regression with recursive identification of government spending shocks as the most appropriate method for the aim of the study and the sample used. The main results indicate that expansionary spending shocks have a positive, but a relatively low effect on output, with the fiscal multiplier around one in the year of the shock and the following year, and lower thereinafter. There are indications that this result is driven by the recent crisis, as multipliers are considerably lower in the pre-crisis period. Effects of fiscal policy are strongly dependent on country structural characteristics. Fiscal multipliers are higher in new European Union member states, in countries with low public debt and low trade openness. Further, spending shocks are followed by rising debt levels in old member states, which could be related well to the recent European debt crisis. Finally, the analysis of the transmission mechanism of fiscal policy yields results that are consistent with both extended Real Business Cycle models and extended New Keynesian models.
    Keywords: fiscal policy; panel VAR; European Union; transition countries
    JEL: E62 C33 H30
    Date: 2017
  2. By: Holton, Sarah; McCann, Fergal
    Abstract: The post-2008 period in the euro area was characterised by sharp dispersion in borrowing costs faced by firms, across both countries and firm types. This dispersion was an important manifestation of the “financial fragmentation” which hampered the smooth transmission of accommodative monetary policy. Using bank level data from 2007 to 2015, we directly measure the borrowing cost dispersion across firm types by calculating the difference in the interest rate charged by the same bank in the same month for loans to small and large firms (the “Small Firm Financing Premium”, SFFP). We assess the role played by both bank and macroeconomic factors in explaining the variation in the SFFP across countries and through time. We provide evidence that bank market power, sovereign bond holdings and balance sheet weaknesses led to disproportionate borrowing cost increases for small firms, and exacerbated the impact of a weak macroeconomy during this period. JEL Classification: G20, G21, E51
    Keywords: bank balance sheets, bank market power, cost of credit, SMEs
    Date: 2017–08
  3. By: Köppl-Turyna, Monika; Lorenz, Hanno
    Abstract: We analyze the effectiveness of an increase in government consumption for stimulating growth for diverse levels of public debt in the European Union. We conclude, that growth rate can be stimulated in the short run by an increase in government consumption but only at low levels of public debt. Moreover, we find that an increase in intermediate consumption is more effective than an increase in compensation of public employees in stimulating output growth.
    Keywords: growth,fiscal stimulus,government consumption,public debt
    JEL: E62 H30 H50 H63
    Date: 2016
  4. By: Johannes Wiegand
    Abstract: When the euro was introduced in 1998, one objective was to create an alternative global reserve currency that would grant benefits to euro area countries similar to the U.S. dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated assets that would increase demand for such assets and reduce euro area members’ funding costs. This paper uses risk perceptions as revelaed in investor surveys to extract a measure of privilege asscociated with euro membership, and traces its evolution over time. It finds that in the 2000s, euro area assets benefited indeed from a significant perceptions premium. While this premium disappeared in the wake of the euro crisis, it has recently returned, although at a reduced size. The paper also produces time-varying estimates of the weights that investors place on macro-economic fundmentals in their assessments of country risk. It finds that the weights of public debt, the current account and real growth increased considerably during the euro crisis, and that these shifts have remained in place even after the immediate financial stress subsided.
    Keywords: Euro;Euro Area;euro crisis, exorbitant privilege, investor perceptions, exorbitant privlege, General
    Date: 2017–07–18
  5. By: Bottazzi, Renata; Trucchi, Serena; Wakefield, Matthew
    Abstract: We estimate marginal propensities to consume from wealth shocks for Italian households early in the Great Recession. Large asset-price shocks in 2007-2008 underpin instrumental variables. A euro fall in risky financial wealth resulted in cuts in annual total (non-durable) consumption of 8.5-9 (5.5-5.7) cents. We find small effects on food spending. Counterfactuals indicate financial-wealth effects were relatively important for consumption falls in Italy in 2007/08. The estimated effects are consistent with a simulated lifecycle model that captures the wealth shock. Also consistent with the model are findings of stronger wealth effects for agents who were pessimistic about stock returns.
    Keywords: Wealth effects; household consumption; the Great Recession
    Date: 2017
  6. By: Thomas Goda; Santiago Sanchez
    Abstract: This paper uses national accounts data to adjust market and disposable Top 10% and Top 1% household survey income shares for 39 developed and developing countries that are part of the Luxembourg Income Study (LIS). An additional novelty of this study is the distinction between labor and capital income. The obtained results suggest that for most countries top income shares are significantly higher than those reported in household surveys, which mainly underestimate top capital income. While the presented results should be treated with some caution, our easy-to-implement approach seems suitable for countries for which no tax data is available.
    Keywords: top income shares, personal income inequality, income distribution, LIS household surveys, system of national accounts (SNA)
    JEL: D31 E25
    Date: 2017–08–01

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