nep-eec New Economics Papers
on European Economics
Issue of 2017‒12‒18
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Quantitative Easing and Sovereign Yield Spreads: Euro-Area Time-Varying Evidence By António Afonso; João Tovar Jalles
  2. Real convergence in the euro area: a long-term perspective By Diaz del Hoyo, Juan Luis; Dorrucci, Ettore; Heinz, Frigyes Ferdinand; Muzikarova, Sona
  3. The portfolio of euro area fund investors and ECB monetary policy announcements By Bubeck, Johannes; Habib, Maurizio Michael; Manganelli, Simone
  4. Economic Integration, Foreign Investment and International Trade: The Effects of Membership of the European Union By Randolph Bruno; Nauro Campos; Saul Estrin; Meng Tian
  5. Fiscal policy with an informal sector By Harris Dellas; Dimitris Malliaropulos; Dimitris Papageorgiou; Evangelia Vourvachaki
  6. Public Debt and Economic Growth Nexus In The Euro Area: A Dynamic Panel ARDL Approach By Chirwa, Themba G; Odhiambo, Nicholas M.
  7. Supra National, National and Regional Dimensions of Voter Turnout in European Parliament Elections By Nadia Fiorino; Nicola Pontarollo; Roberto Ricciuti
  8. Modelling euro banknote quality in circulation By Deinhammer, Harald; Ladi, Anna
  9. Study and Reports on the VAT Gap in the EU-28 Member States: 2017 Final Report By Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; Misha V. Belkindas
  10. Expectations and uncertainty: A common-source infection model for selected European countries By Luca Gerotto; Antonio Paradiso
  11. Developing macroprudential policy for alternative investment funds By van der Veer, Koen; Levels, Anouk; Lambert, Claudia; Vivar, Luis Molestina; Weistroffer, Christian; Chaudron, Raymond; van Stralen, René de Sousa

  1. By: António Afonso; João Tovar Jalles
    Abstract: We assess the determinants of sovereign bond yield spreads in the period 1999-2016, considering non-conventional monetary policy measures in the Euro area. We use a 2-step approach: i) confirm (by means of model selection methods) and estimate (by means of panel techniques) the determinants of sovereign bond yield spreads; ii) compute bivariate time-varying coefficient (TVC) models of each determinant on government bond spreads and analyse the temporal dynamics of resulting estimates. Our results show that the baseline determinants of sovereign bond yield spreads in the Euro area are the bid-ask spread, the VIX, fiscal developments and rating developments, REER, and economic growth. In recent years, additional relevant determinants became the QE measures implemented by the ECB in the aftermath of the economic and financial crisis. From the TVC analysis, the Covered Bond Purchase Programme contributed to reduce yield spreads in all Euro area countries in the analysis, particularly in the crisis period, 2011-2013. In addition, longer-term refinancing operations contributed to reduce yield spreads in most countries.
    Keywords: sovereign bonds, fiscal policy, non-conventional monetary policy, time-varying coefficients, model selection, panel data
    JEL: C23 E52 E62 G10 H63
    Date: 2017–12
  2. By: Diaz del Hoyo, Juan Luis; Dorrucci, Ettore; Heinz, Frigyes Ferdinand; Muzikarova, Sona
    Abstract: In the euro area, there is mixed evidence that the GDP per capita of lower-income economies has been catching up with that of higher-income economies since the start of monetary union. The significant real convergence performance of some of the most recent members contrasts with that of the economies of southern Europe, which have not met expectations. However, attributing all the blame for this outcome to the introduction of the single currency simply misses the point. By taking a “long view” and reviewing the evidence since the 1960s, this paper shows that certain member countries began to face a “non-convergence trap” long before the euro years. We also provide stylised facts on: (i) the central role of total factor productivity in driving real convergence in the euro area over time, alongside other factors; and (ii) the crucial interaction of real convergence with “Maastricht convergence” and institutional quality, the other two key components of sustainable economic convergence. We conclude that it is critical that the euro area countries facing convergence challenges enhance the resilience of their economic structures by improving the relevant institutions and governance. JEL Classification: E01, F15, J11, O11, O43, O47, O52, O57
    Keywords: Five Presidents’ Report, GDP per capita, institutional quality, labour productivity, Maastricht convergence criteria, nominal convergence, real convergence, Reflection Paper on the Deepening of EMU, sustainable economic convergence, total factor productivity
    Date: 2017–12
  3. By: Bubeck, Johannes; Habib, Maurizio Michael; Manganelli, Simone
    Abstract: This paper studies the impact of major ECB monetary policy announcements on the portfolio allocation of euro area fund investors, using daily data between 2012 and mid-2016, a period that includes a variety of unconventional measures. We distinguish between active portfolio reallocation, driven by redemptions or injections of investors, and passive portfolio rebalancing, triggered by valuation effects related to changes in asset prices and exchange rates. We find that, for this class of fund investors, policy announcements work mainly through valuation effects (the signalling channel), rather than via active reallocation (the portfolio rebalancing channel). Notably, since the autumn of 2014, monetary policy shocks triggered large asset price and exchange rate effects and prompted a passive shift of euro area investors into riskier assets, in particular European and Emerging Market equity funds and out of bond funds. JEL Classification: G11, G15
    Keywords: asset allocation, euro area, European Central Bank, investment funds, monetary policy
    Date: 2017–12
  4. By: Randolph Bruno; Nauro Campos; Saul Estrin; Meng Tian
    Abstract: This paper investigates the importance of economic integration in simultaneously fostering foreign direct investment (FDI) and international trade. These have rarely been analyzed jointly using contemporary econometric methods. We estimate the effect of European Union (EU) membership on FDI inflows and trade using annual bilateral data from 34 OECD countries over 1985-2013. We find that EU membership increases FDI inflows by on average 28%. We jointly estimate the impact of EU membership on trade and FDI and find that they are substantial, with the one on trade larger than the one on FDI, in the order of double.
    Keywords: special economic integration effects, foreign direct investment, international trade, European Union, gravity model
    JEL: F17 F21 F36
    Date: 2017–11
  5. By: Harris Dellas (University of Bern); Dimitris Malliaropulos (Bank of Greece); Dimitris Papageorgiou (Bank of Greece); Evangelia Vourvachaki (Bank of Greece)
    Abstract: Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal –in particular tax– policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation implemented in Greece over the period 2010–2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece’s failure to achieve orderly debt consolidation while avoiding economic depression.
    Keywords: Shadow economy; fiscal consolidation, multipliers, tax revenue, true output
    JEL: E26 E32 E62 E65 H26 H68
    Date: 2017–10
  6. By: Chirwa, Themba G; Odhiambo, Nicholas M.
    Abstract: This study investigates the relationship between public debt and economic growth using panel data from 10 European countries. Using a panel ARDL approach, the results show that public debt, government consumption, and the real exchange rate are negatively associated with economic growth in both the short and the long run. Furthermore, investment and the real interest rate were found to be positively associated with economic growth in both the short and the long run. Inflation and trade openness were found to have mixed results: both were negatively associated with economic growth in the long run while in the short run the relationship was positive and consistent across groups with a few exceptions. Second, the study results also showed that debt is nonlinear at the 70% threshold only in the long run, while in the short run the results were consistently negative and across groups. The study results have significant policy implications for the Stability and Growth Pact of the Euro area. It is recommended that member states should ensure fiscal sustainability by balancing their fiscal budgets to effectively reduce the accumulation of public debt as well as implementing structural reforms that will improve the efficiency of investment as well as macroeconomic stability.
    Keywords: Cointegration; Economic Growth; Euro Area; Panel ARDL Models; Public Debt
    Date: 2017–12
  7. By: Nadia Fiorino (University of L'Aquila); Nicola Pontarollo (European Commission – JRC); Roberto Ricciuti (University of Verona and CESifo)
    Abstract: We argue that the decision to vote in European Parliamentary (EP) elections lies at the intersection of three political dimensions: one related to the attitude of citizens towards the European Union, one to the characteristics of the national political system, and the third associated with socio-economic variables observed by voters at the local level. This paper investigates this intersection by analyzing the last four EP elections in the EU-14, for 164 regions. We test a multilevel model. The results indicate a significant role of compulsory voting, domestic political cleavages, labor market conditions and trust in the EU. No evidence is found that GDP per capita affects turnout. Finally, the oldest segment of population seems more prone to vote than the youngest.
    Keywords: European Parliamentary elections, voter turnout, subnational variation, multilevel model
    JEL: O4 O53 C21 C23
    Date: 2017–11
  8. By: Deinhammer, Harald; Ladi, Anna
    Abstract: The quality of banknotes in the cash cycles of countries in the Eurosystem varies, despite all of these countries using identical euro banknotes. While it is known that this is dependent on national characteristics, such as public use and the involvement of the central bank in cash processing operations, the influence of all relevant parameters has not yet been established. This paper presents two computer-based models for the simulation of banknote cash cycles. The first model simulates a cash cycle using a theoretical approach based on key figures and models banknote fitness as a one-dimensional profile of fitness levels. The model identifies: (i) the frequency with which banknotes are returned to the central bank; (ii) the fitness threshold used in automated note processing at the central bank; and (iii) the note lifetime as the main drivers of banknote quality in circulation as well as central bank cash cycle costs. Production variations in new banknotes, the fitness threshold applied by commercial cash handlers and the accuracy of the fitness sensors used in the sorting process have been found to have a lower but non-trivial impact. The second model simulates banknotes in circulation as single entities and is oriented towards modelling country-specific cash cycles using available single-note data. The model is constructed using data collected by monitoring banknotes in circulation over the duration of a “circulation trial” carried out in three euro area countries. We compare the predicted quality results of the second data-based model against actual cash cycle data collected outside the circulation trial, discuss the reasons for the deviations found and conclude with considerations for an optimal theoretical national cash cycle. JEL Classification: C46, C63, E42, E58
    Keywords: banknote circulation, banknote lifetime, banknote quality, banknotes, circulation modelling
    Date: 2017–12
  9. By: Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; Misha V. Belkindas
    Abstract: This analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, 2015, and 2016. We present new estimates of the VAT Gap and the Policy Gap for the year 2015, as well as updated estimates for the years 2011?2014. This report provides first estimates of the VAT Gap for Cyprus, using the newly revised national accounts data from the Cyprus Statistical Agency. The VAT Gap is the difference between the amount of VAT revenue actually collected and the theoretical amount that is expected to be collected, given the observed information on the country’s economy and the actual VAT legislation. The amount of VAT total theoretical liability, known as VTTL, is calculated using the so-called “top-down” approach: the national VAT rate structure is imposed on the national accounts expenditure and investment data at the most detailed level possible to derive expected liability
    Keywords: consumption taxation, VAT, tax fraud, tax evasion, tax avoidance, tax gap,tax non-compliance, policy gap
    JEL: H24 H26
    Date: 2017
  10. By: Luca Gerotto (Department of Economics, University Of Venice Cà Foscari); Antonio Paradiso (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We present a common-source infection model for explaining the formation of expectations by households. Starting from the framework of "Macroeconomic expectations of household and professional forecasters" (C.D. Carroll, The Quarterly Journal of Economics, 2003), we augment the original model assuming that also uninformed individuals are able to update expectations according to a naive econometric process. In this novel framework, a key role is played by the parameter measuring the probability of being informed: the dynamics of this factor over time capture the level of uncertainty perceived by households. This new framework is applied to study unemployment expectations for a selected group of European countries (France, Germany, Italy and the UK). Our results show that: (i) the novel framework is supported by data on unemployment expectations; and (ii) the probability of being informed is (negatively) correlated with the level of uncertainty spread by newspapers and conveyed by Internet.
    Keywords: Expectations, Unemployment
    JEL: D84 E24
    Date: 2017
  11. By: van der Veer, Koen; Levels, Anouk; Lambert, Claudia; Vivar, Luis Molestina; Weistroffer, Christian; Chaudron, Raymond; van Stralen, René de Sousa
    Abstract: This joint ECB-DNB Occasional Paper aims to inform the ongoing discussions about an EU-level framework for operationalising macroprudential leverage limits for alternative investment funds (AIFs). It builds on, and extends, the analysis of an ECB-DNB special feature article published in the ECB’s Financial Stability Review in November 2016. First, this Occasional Paper presents new EU-level evidence suggesting that leveraged funds exhibit stronger sensitivity of investor outflows to bad past performance than unleveraged funds, which has the potential to exacerbate systemic risk. Second, it devises a framework for assessing financial stability risks from leverage in investment funds. This is applied to leveraged AIFs managed by asset managers in the Netherlands using Alternative Investment Fund Managers Directive (AIFMD) data for the two-year period from the first quarter of 2015 to the fourth quarter of 2016. Third, it discusses the potential effectiveness and efficiency of various designs for macroprudential leverage limits. To this end, it builds on the findings for the Dutch AIF sector and suggests design options for further exploration at EU level. Beyond assessing financial stability risks from leverage in the Dutch AIF sector, the case study aims to show how equivalent information on AIFs at the European level – which will be made available to the European Securities Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) in the coming years – could be used when developing an EU-level framework for operationalising macroprudential leverage limits. JEL Classification: G23, G28, E61
    Keywords: alternative investment funds, asset managers, financial stability, leverage, macroprudential policy
    Date: 2017–11

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