nep-eec New Economics Papers
on European Economics
Issue of 2017‒10‒01
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries By Jan Hajek; Roman Horvath
  2. "Public debt and economic growth: Further evidence euro area" By Marta Gómez-Puig; Simón Sosvilla-Rivero
  3. The Demand for Money for EMU: A Flexible Functional Form Approach By William Barnett; Neepa B. Gaekwad
  4. Global value chains, trade shocks and jobs: an application to Brexit By Hylke Vandenbussche; William Connell Garcia; Wouter Simons
  5. Fiscal Consolidations in a Low Inflation Environment:Pay cuts versus Lost Jobs By Almeida, Guilherme; Pappa, Evi; Sajedi, Rana; Vella, Eugenia
  6. The Euro Area’s Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening? By Sven Steinkamp; Aaron Tornell; Frank Westermann
  7. Business cycle synchronisation in a currency union : Taking stock of the evidence By Campos, Nauro F.; Jarko, Fidrmuc; Iikka, Korhonen
  8. Why Grexit cannot save Greece (but staying in the Euro area might) By Chrysafis Iordanoglou; Manos Matsaganis
  9. What Drives Pension Reform Measures in the OECD? Evidence based on a New Comprehensive Dataset and Theory By Beetsma, Roel; Romp, Ward E; van Maurik, Ron
  10. Dynamics of net foreign asset components in the EMU By Tatiana Cesaroni; Roberta Desantis
  11. Before It Gets Better: The Short-Term Employment Costs of Regulatory Reforms By Bassanini, Andrea; Cingano, Federico

  1. By: Jan Hajek; Roman Horvath
    Abstract: We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
    Keywords: Global VAR, international spillovers, monetary policy, shadow rate
    JEL: E52 E58
    Date: 2017–09
  2. By: Marta Gómez-Puig (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona,Spain.); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.)
    Abstract: This paper empirically investigates the short and long run impact of public debt on economic growth. We use annual data from both central and peripheral countries of the euro area (EA) for the 1961-2013 period and estimate a production function augmented with a debt stock term by applying the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our results suggest different patterns across EA countries and tend to support the view that public debt always has a negative impact on the long-run performance of EA member states, whilst its short-run effect may be positive depending on the country.
    Keywords: Public debt, economic growth, bounds testing, euro area, peripheral euro area countries, central euro area countries. JEL classification: C22, F33, H63, O40, O52.
    Date: 2017–09
  3. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Neepa B. Gaekwad (Department of Economics, The University of Kansas;)
    Abstract: Monetary aggregates have a special role under the "two pillar strategy" of the ECB. Hence, the need for a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the EMU-11 countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate in accordance with Barnett (2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer's utility function, using Barnett’s (1983) locally flexible functional form, the minflex Laurent Indirect utility function. The analysis of elasticities with respect to the asset’s user-cost prices shows that: (i) transaction balances (TB) and deposits redeemable at notice (DRN) are income elastic, (ii) the DRN display large variation in price elasticity, and (iii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB has Divisia monetary aggregates provided to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.
    Keywords: Divisia monetary aggregation, European Monetary Union, monetary aggregation theory, multilateral aggregation, minflex Laurent, elasticities of demand.
    JEL: C43 C82 D12 E51 F33
    Date: 2017–09
  4. By: Hylke Vandenbussche; William Connell Garcia; Wouter Simons
    Abstract: This paper develops a gravity model with sector-level input-output linkages in production. In contrast to a traditional gravity approach, which relies on direct gross exports between bilateral trade partners, our model additionally includes (1) domestic and global value chain linkages between goods and services sectors, (2) bilateral tariffs that affect direct production for a final destination as well as indirect production (shipped via third countries) to a final destination and (3) value added rather than gross production. Including input-output linkages implies that domestic production of intermediates can serve as inputs in foreign products and subsequently be exported “indirectly” to a final destination. Our input-output model can be taken to the sectoral World Input Output Database (WIOD) and can be used to evaluate trade policy shocks. While our framework is entirely general, we use it to predict the impact of the UK's withdrawal from the European Union (“Brexit”) in terms of value added production and employment for every individual EU country involved. We find that Brexit hits the UK relatively harder than the EU-27. In contrast to other studies, we find EU-27 losses from Brexit to be substantially higher than hitherto believed.
    Date: 2017
  5. By: Almeida, Guilherme; Pappa, Evi; Sajedi, Rana; Vella, Eugenia
    Abstract: We construct a model of a monetary union to study fiscal consolidation in the Periphery of the Euro area, through cuts in public sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a posi- tive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase un- employment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the Periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.
    Keywords: fiscal consolidation; Public Wage Bill; zero lower bound
    JEL: E32 E62
    Date: 2017–09
  6. By: Sven Steinkamp (University Osnabrueck); Aaron Tornell (UC Los Angeles); Frank Westermann (University Osnabrueck)
    Abstract: The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.
    Keywords: Single Supervisory Mechanism; Evergreening; Non-performing Loans; Common-pool Problem
    JEL: F33 F55 E58
    Date: 2017–09–15
  7. By: Campos, Nauro F.; Jarko, Fidrmuc; Iikka, Korhonen
    Abstract: This paper offers a first systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3,000 business cycle synchronisation coefficients as well as their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); (3) there is evidence of country-specific publication bias; (4) our difference-in-differences estimates suggest the euro accounted for approximately half of the observed increase in synchronisation.
    JEL: E32 F42
    Date: 2017–09–20
  8. By: Chrysafis Iordanoglou; Manos Matsaganis
    Abstract: Grexit was narrowly averted in summer 2015. Nevertheless, the view that Greece might be better off outside the Euro area has never really gone away. Moreover, although Marine Le Pen’s bid for the French presidency was frustrated in May 2017, in Italy a disparate coalition, encompassing Beppe Grillo’s Movimento Cinque Stelle as well as Matteo Salvini’s Lega Nord, has called for a referendum on exiting the Euro. In this context, our argument that Grexit cannot save Greece may be of some relevance to national debates elsewhere in Europe. The paper examines the case for Grexit by offering a detailed account of its likely effects. Its structure is as follows. Section 2 analyses the transition, with the two currencies (old and new) coexisting. Section 3 charts the challenges facing the Greek economy in the short term, after the new national currency has become legal tender. Section 4 assesses prospects in the medium term, with Grexit complete and the new currency drastically devalued. Section 5 reviews the underlying weaknesses of Greece’s growth regime and explains why these are unrelated to the nominal exchange rate. Section 6 discusses the conditions for an investment-led recovery, and shows why tackling them would be more difficult outside the Euro area. Section 7 sums up and concludes.
    Keywords: Greece, Grexit, Eurozone, growth regime
    Date: 2017–08
  9. By: Beetsma, Roel; Romp, Ward E; van Maurik, Ron
    Abstract: Using a narrative approach we construct a unique dataset of pension reform measures for a broad sample of OECD countries over the period since 1970 and explore the determinants of those reforms based on information available at the time of legislation. We distinguish three potential reform regimes: expansion of pension arrangements through increased coverage, eligibility or higher benefits; contraction aimed at enhancing financial and fiscal sustainability or stimulating work incentives; and a regime that combines expansionary and contractionary reform measures occurring in the same year. Over time the expansionary regime has become less prevalent. The incidence of the other two regimes has increased over time. None of the three regimes are affected by current or projected future demographic changes. This finding is remarkable, as we would a priori expect reform measures to be closely linked to long-run financial sustainability considerations. By contrast, business cycle indicators play a substantially larger role. A worsening of the business cycle enhances the likelihood of the contractionary and combination regimes, and reduces that of the expansionary regime during the second part of the sample period. We present a simple theoretical model with an adjustment cost of changing the pension arrangement that can account for the responsiveness to the business cycle and the non-responsiveness to demographic forecasts.
    Keywords: business cycle indicators; contraction; expansion; narrative identification; old-age dependency ratio; pension reform measures
    JEL: H55 H62 J11 J26
    Date: 2017–09
  10. By: Tatiana Cesaroni (Bank of Italy); Roberta Desantis (Italian National Institute of Statistics)
    Abstract: In the last two decades, foreign capital investments have followed different paths in EMU countries. Given their importance for growth and productivity, we analyse the factors underlying the dynamics of foreign direct investments, portfolio debt investments, and portfolio equity investments in EMU countries over the years 1996-2014. We assess how the heterogeneous behaviour between core and peripheral countries can be related to macroeconomic factors (business cycle, trade, financial openness and spreads) and institutional quality. Our results show that financial integration as well as interest rates spread had an impact on the main components of foreign assets which was different between core and peripheral countries. In EMU countries as a whole we find a statistical significant relationship between institutional quality andforeign capital components, which is entirely driven by core countries.
    Keywords: Net international investment positions, PEI, FDI and PDI, Institutional quality, Euro area.
    JEL: F3 F4
    Date: 2017
  11. By: Bassanini, Andrea (OECD); Cingano, Federico (Bank of Italy)
    Abstract: We exploit long time series of industry-level data in a group of OECD countries to analyze the short-term labor market effects of reforms lowering barriers to entry and dismissal costs. Our estimates show that both policies induce non-negligible transitory employment losses, a result that is confirmed by complementary evidence from case studies of three recently implemented EPL reforms. The strength of these effects varies depending on the underlying industry and labor market structure, and on cyclical conditions: the employment cost of deregulation is higher in economic downturns, negligible in good times. These findings prove robust to a set of specification and sensitivity checks, and are confirmed after standard reverse causality and falsification tests.
    Keywords: product market regulation, EPL, employment losses, industry data
    JEL: J23 L51 L11
    Date: 2017–09

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