nep-eec New Economics Papers
on European Economics
Issue of 2017‒10‒15
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Are there common structural determinants of potential output growth in Europe? An empirical exercise for 11 EMU countries By Roberta De Santis; Piero Esposito; Elena Masi
  2. External Imbalances, Gross Capital Flows and Sovereign Debt Crises By Sergio de Ferra
  3. Quantitative Easing in the Euro Area - An Event Study Approach By Urbschat, Florian; Watzka, Sebasitan
  4. The Future of Eurozone Fiscal Governance By Anne-Laure Delatte; Clemens Fuest; Daniel Gros; Friedrich Heinemann; Martin Kocher; Roberto Tamborini
  5. “Whatever it takes†to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
  6. The Imact of Brexit on Foreign Investment and Production By Andrea Waddle; Ellen McGrattan
  7. Currency risk in corporate bond spreads in the eurozone By Michael Bleaney; Veronica Veleanu
  8. Shield the US from Imports! – GDP Impacts on Finland and Other European Union Member States By Ali-Yrkkö, Jyrki; Kuusi, Tero
  9. Homeownership, Social Insurance, and Old-Age Security in the United States and Europe By Stipica Mudrazija; Barbara A. Butrica
  10. Measuring Inflation Anchoring and Uncertainty : A US and Euro Area Comparison By Olesya V. Grishchenko; Sarah Mouabbi; Jean-Paul Renne
  11. Rethinking fiscal policy lessons from the European Monetary Union (EMU) By Saraceno, Francesco.
  12. The Legacy of a Fractured Eurozone: the Greek Dra(ch)ma By John Hatgioannides; Marika Karanassou; Hector Sala; Menelaos Karanasos; Panagiotis Koutroumpis
  13. The German current account surplus: where does it come from, is it harmful and should Germany do something about it? By Gabriel Felbermayr; Clemens Fuest; Timo Wollmershäuser
  14. Dynamics of net foreign asset components in the EMU By Tatiana Cesaroni; Roberta De Santis
  15. Designing QE to overcome the lower bound constraint on interest rates in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  16. The Econometrics of the EU Fiscal Governance: is the European Commission methodology still adequate? By Fioramanti, Marco; Waldmann, Robert J.

  1. By: Roberta De Santis; Piero Esposito; Elena Masi
    Abstract: GDP growth in the Eurozone during the last twenty years continuously decreased. In addition, the global financial crisis and subsequent events seem to have, on average, shifted the trajectory of the Eurozone’s potential output downward. A key question is whether this trend is a permanent result of “secular stagnation” or if economic policies might improve the situation. In this paper, we test the impact of several structural determinants of potential output growth using a dynamic panel data methodology for 11 main EMU members for the period 1996-2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and sovereign debt crises, contributed to the slowdown of potential growth. Estimated results suggest that population, tertiary education, research and development expenditure, trade and financial openness, and institutional quality contributed significantly to potential output growth in the EMU during the period under examination. We further find that debt accumulation affects positively and significantly potential growth for debt values up to 90% of GDP.
    Keywords: Determinants of growth, potential output growth, reforms, institutional quality, fiscal rules, secular stagnation
    JEL: O29 O41 O43 O47
    Date: 2017–08
  2. By: Sergio de Ferra (Stockholm University)
    Abstract: The experience of the European monetary union has been characterized by three distinctive facts. First, core and periphery countries ran widening current account surplus and deficit positions, after the inception of the union. Second, core countries intermediated gross capital flows from the rest of the world, which in turn financed deficits in the periphery. Finally, a sovereign debt crisis took place, affecting multiple countries and causing severe recessions. I argue that institutional features of the European Economic and Monetary Union are responsible for the observation of imbalances, intermediation and pervasive crises. First, I show in a theoretical model that subsidies on holdings of euro-denominated assets contribute to all three phenomena. Second, I build a dynamic model of an economic union with trade in goods and financial assets. In the model, the introduction of a subsidy on cross-border asset holdings generates predictions for net and gross asset flows that quantitatively replicate the euro area experience. The model features a novel theoretical mechanism magnifying the severity of a debt crisis in an economic union, due to the joint presence of financial and trade linkages among union members. This mechanism is likely to have exacerbated the recent recession in the euro area periphery.
    Date: 2017
  3. By: Urbschat, Florian; Watzka, Sebasitan
    Abstract: We examine the effects of the QE programme started by the ECB in 2015. Studying the short-term reaction of bond markets, we try to quantify different asset price channels such as the portfolio rebalance channel by running event regressions for several Euro Area countries. Our analysis suggests that the ECB’s policy had strong and desired effects on bond markets at the very beginning, but less so subsequently. Possible explanations are the increasingly burdensome institutional set-up of the APP.
    JEL: E43 E44 E52 E58 G14
    Date: 2017
  4. By: Anne-Laure Delatte; Clemens Fuest; Daniel Gros; Friedrich Heinemann; Martin Kocher; Roberto Tamborini
    Abstract: This paper discusses various options for reforming fiscal governance in the Eurozone. We focus on two possible reform approaches referred to as the ‘Maastricht model’ and the ‘US model’. The Maastricht model implies that ultimate responsibility for economic and fiscal policy remains at the national level. The US model, by contrast, calls for the development of much stronger European institutions. In both cases some degree of policy coordination, a European Banking Union and insolvency procedures for sovereigns are indispensable. We discuss the challenges and trade-offs involved and argue that certain elements of the two approaches which combine increased risk sharing with increased market discipline and risk reduction could be combined to achieve a more resilient and economically successful Eurozone.
    Date: 2017
  5. By: Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    Date: 2017–09
  6. By: Andrea Waddle (University of Richmond); Ellen McGrattan (University of Minnesota)
    Abstract: In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly.
    Date: 2017
  7. By: Michael Bleaney; Veronica Veleanu
    Abstract: Corporate bond yields generally follow yields on sovereign debt when debt is denominated in foreign currency (FC), but have historically behaved rather differently when debt is denominated in domestic currency (DC), with noticeable spikes in big recessions that are not matched by spikes in yields on sovereign debt. This difference reflects a currency risk on FC debt that is common to sovereign and corporate bonds but which is absent from DC debt. Euro-denominated corporate bonds issued in the Eurozone are DC debt, yet it is shown here that outside Germany their yields are strongly influenced by yields on sovereign debt, like FC debt, after controlling carefully for other factors. We argue that this can be attributed to currency risk associated with a possible split in the Eurozone.
    Keywords: corporate bond spreads, currency risk, sovereign default risk
    Date: 2017
  8. By: Ali-Yrkkö, Jyrki; Kuusi, Tero
    Abstract: We analyze the value-added impacts of rising (United States) US protectionism on Finland and other European Union (EU) member states. The president of the US has proposed tariff increases, particularly on imports from Mexico and China to the US, while the threat of protectionism also involves more direct tariffs against EU exports to the US. We apply a measurement framework for the decomposition of value-added trade to the US grounded on hypothetical extraction, a mathematical technique based on an input-output representation of the global economy. Our results show that trade to the US continues to be an important source of the value added for Finland as well as the majority of the EU, even during the temporary slowdown of trade during the Great Recession. For many countries, trade to the US represents over 10% of the value added from exports to all countries. We find that a large majority of the value added for both Finland and the EU goes directly as intermediate or final goods and services to the US. Much less value added is generated via other countries through either their intermediate or direct final exports to the US. The other most important trade channel is through Germany. We investigate the effect of the trade barriers in several counterfactual scenarios. Using standard export elasticity estimates, we find that the value added generated by Finland and other EU countries through Mexico and China to the US would decline drastically if the US launched tariff rises on imports from Mexico and China to the US. The impacts would be significantly worse if the US raised tariff rates on direct imports from EU countries.
    Keywords: Global value chain, GVC, tax, tariff, customs, border, GDP, impact, indirect
    JEL: F13 F14 F23 L23
    Date: 2017–10–04
  9. By: Stipica Mudrazija; Barbara A. Butrica
    Abstract: Relatively few Americans have accumulated substantial savings outside of their employer-sponsored retirement plans, yet most own their homes. The traditional view of the retirement income system as a three-legged stool supported by Social Security, private pensions, and savings may be better viewed as being supported by Social Security, pensions, and homeownership. Country-specific economic, social, and political developments throughout modern history mean that homeownership rates and the relative importance of homeownership for old-age security vary widely across developed countries. Many countries, however, are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a substitute for various social transfers. This paper uses data from the Health and Retirement Study (HRS) and the Survey of Health, Ageing, and Retirement in Europe (SHARE) to better understand the role of homeownership in retirement before and after the Great Recession for the United States and nine Western European countries: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, and Sweden. It begins by comparing trends in homeownership rates among older adults and the key characteristics of housing-related policies and regulations that potentially impact home acquisition. It then examines home equity trends, the prevalence and burden of housing debt, and the relative importance of housing as a source of retirement wealth. Next it provides an overview of equity release options and estimates how much older households could increase their incomes by fully monetizing their housing equity. Finally, the paper discusses the prospects for and limits of home equity release and asset-based welfare policies.
    Date: 2017–10
  10. By: Olesya V. Grishchenko; Sarah Mouabbi; Jean-Paul Renne
    Abstract: We use several US and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time-varying uncertainty. We obtain survey-consistent distributions of future inflation at any horizon, both in the US and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the US, while mild de-anchoring occurred in the euro-area. As of our sample end, both areas appear to be equally anchored.
    Keywords: Anchoring of inflation expectations ; Dynamic factor model ; Inflation ; Stochastic volatility ; Surveys of professional forecasters ; Term structure of inflation expectations and inflation uncertainty
    JEL: C32 E41 E44
    Date: 2017–10–03
  11. By: Saraceno, Francesco.
    Abstract: This paper challenges the ideological and empirical basis of the “New Consensus” to macroeconomic policy, which advocates limited government intervention to correct short-term deviations from the growth path constrained by a rules-based framework. Based on the recent experience of the United States and the Economic and Monetary Union of the European Union (EMU), the paper argues that the New Consensus has yielded a policy stance that is excessively “hands off”, slow to respond to economic downturns, and has led to premature austerity, all of which have stifled the recovery. This provides lessons for not only developed countries, but also developing and emerging economies seeking to design macroeconomic policy frameworks to cope with the economic cycle and spillovers from the globalized economy.
    Keywords: fiscal policy, macroeconomics, EMU, USA
    Date: 2017
  12. By: John Hatgioannides; Marika Karanassou; Hector Sala; Menelaos Karanasos; Panagiotis Koutroumpis
    Abstract: This paper addresses the acute Greek economic and social crisis that was inflicted on Greece since 2010 with the unleashing of the 3 consecutive bailout plans and the implementation of fierce austerity policies. We further scrutinise the composition of the soaring Greek debt and, most importantly, the unsettling utilisation of the Troika loans for the 2010-2015 period. We provide evidence that the vast bulk of the loans went overwhelmingly not to benefiting a "profligate" Greek state but to avoiding the write downs of bad loans made by reckless creditors (mainly, German and French banks) to the Greek government and private banks. We propose the temporary adoption of a parallel currency in the form of government IOUs, together with other drastic measures to reboot the ailing Greek economy inside the Eurozone.
    Keywords: Greek crisis, Eurozone, sovereign debt, austerity, parallel currency
    Date: 2017–09
  13. By: Gabriel Felbermayr; Clemens Fuest; Timo Wollmershäuser
    Abstract: In the international economic policy debate Germany is criticized heavily for its current account surplus. This paper describes the factors that have led to the surplus and discusses the policy implications. The current account surplus is mainly a result of higher savings, driven by an ageing population. The claim that the German surplus causes economic damage either in Germany or in other countries is not well founded. But Germany faces growing political pressures related to the threat of protectionism, the risk that a growing creditor position may lead to political backlash, and the fact that European Macroeconomic Imbalances Procedures imply that current account surpluses should not exceed six percent of GDP. To reduce the surplus Germany should focus on a corporate tax reform to boost private investment.
    Date: 2017
  14. By: Tatiana Cesaroni; Roberta De Santis
    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 behavior 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 and foreign 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: 2017–09
  15. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a model of a fiscally sound monetary union and analyses central bank purchases of long-term debt (QE). Employing the portfolio balance channel, we show that there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. We show further that the symmetry of QE depends on whether the monetary union is characterised by asymmetric shocks or asymmetric structures.
    JEL: E43 E52 E61 E63
    Date: 2017
  16. By: Fioramanti, Marco; Waldmann, Robert J.
    Abstract: Following the 2005 regulations emending the Stability and Growth Pact with the introduction of country-specific objectives in structural terms, the EU fiscal governance is based on the concept of Potential Output, the highest level of production an economy can sustain without incurring inflationary pressure. Potential Output is an unobservable quantity and, for this reason, it must be estimated. There are many techniques to obtain an estimate of the potential of an economy, each of which with pros and cons. The methodology adopted by the European Commission and EU Member States, while consistent with most of the recent economic and econometric theory, is still not robust enough to give a unique and irrefutable measure on which to base EU’s fiscal framework. In this paper, we challenge the EC's approach showing its failure to adequately capture the relation between inflation and cyclical unemployment, the Phillips curve, in estimating the trend unemployment. Should fiscal policy continue to be based on this concept, further extension of the methodology must be implemented in order to obtain more robust estimates.
    Keywords: Potential output, Output gap, Structural balance, NAWRU, Phillips curve
    JEL: C10 E32 E60 H60
    Date: 2017–09–15

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