nep-eec New Economics Papers
on European Economics
Issue of 2018‒01‒29
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Global Multi-Country Model (GM): an Estimated DSGE Model for the Euro Area Countries By Alice, Albonico; Ludovic, Calès; Roberta, Cardani; Olga, Croitorov; Filippo, Ferroni; Massimo, Giovannini; Stefan, Hohberger; Beatrice, Pataracchia; Filippo, Pericoli; Rafal, Raciborski; Marco, Ratto; Werner, Roeger; Lukas, Vogel
  2. 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
  3. Integration and Disintegration of EMU Government Bond Markets By Leschinski, Christian; Voges, Michelle; Sibbertsen, Philipp
  4. Disentangling goods, labor, and credit market frictions in three European economies By Brzustowski, Thomas; Petrosky-Nadeau, Nicolas; Wasmer, Etienne
  5. How Immigrants Helped EU Labor Markets to Adjust during the Great Recession By Martin Kahanec
  6. Decentralized multinational banks and risk taking: the spanish experience in the crisis By Isabel Argimón
  7. Sovereign Risk Contagion By Cristina Arellano; Yan Bai; Sandra Lizarazo
  8. Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE By Óscar Arce; Ricardo Gimeno; Sergio Mayordomo
  9. Dynamics and Factors of Inflation Convergence in the European Union By Vaclav Broz; Evzen Kocenda
  10. An anatomy of the spanish current account adjustment: the role of permanent and transitory factors By Enrique Moral-Benito; Francesca Viani
  11. Cyclicality of the R&D Share of Investment in the EU over the Period before and after the Crisis By Roberto Censolo; Caterina Colombo
  12. The Propagation of Business Sentiment within the European Union? By Anja Kukuvec; Harald Oberhofer
  13. What if supply-side policies are not enough? The perverse interaction of flexibility and austerity By Giovanni Dosi; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
  14. The European Deposit Insurance Scheme: Assessing risk absorption via SYMBOL By Lucia, Alessi; Giuseppina, Cannas; Sara, Maccaferri; Marco, Petracco Giudici
  15. Exchange Rate Co-movements, Hedging and Volatility Spillovers in New EU Forex Markets By Evzen Kocenda; Michala Moravcova
  16. Working Paper 01-17 - Public Investment in Belgium - Current State and Economic Impact By Bernadette Biatour; Chantal Kegels; Jan van der Linden; Dirk Verwerft
  17. Which Accounting Rules for Economic and Social Sustainable Development? Engaging Critically with IFRS Adoption in the EU. By Palea, Vera; Biancone, Paolo Pietro

  1. By: Alice, Albonico (Università degli Studi di Milano-Bicocca); Ludovic, Calès (European Commission – JRC); Roberta, Cardani (European Commission - JRC); Olga, Croitorov (European Commission - JRC); Filippo, Ferroni (Federal Reserve Bank of Chicago); Massimo, Giovannini (European Commission - JRC); Stefan, Hohberger (European Commission - JRC); Beatrice, Pataracchia (European Commission - JRC); Filippo, Pericoli (European Commission - JRC); Rafal, Raciborski (Vistula University); Marco, Ratto (European Commission - JRC); Werner, Roeger (European Commission); Lukas, Vogel (European Commission)
    Abstract: This paper presents the European Commission's Global Multi-country model (the GM model). The GM model is an estimated multi-country DSGE model, developed by the European Commission, that can be used for spillover analysis, forecasting and medium term projections. Its development is jointly performed by the Joint Research Centre and DG ECFIN. Since the GM model is developed to be flexible under different country configurations,we present the GM model in its configuration designed for EMU-countries (GM3-EMU), which has been estimated for the four largest European economies (Germany, France, Italy and Spain). We analyse business cycle properties, present the model fit and provide a quantitative assessment of the relative importance that supply, demand and international shocks as well as discretionary policy interventions had in explaining the cyclical patterns observed in each country since the establishment of the EMU.
    Keywords: DSGE; Bayesian estimation; EMU; Business cycle; Model fit; Cross-country comparison
    JEL: C51 E31
    Date: 2017–12
  2. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    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: International spillovers, monetary policy, global VAR, shadow rate
    JEL: E52 E58
    Date: 2017–09
  3. By: Leschinski, Christian; Voges, Michelle; Sibbertsen, Philipp
    Abstract: This paper analyzes market integration among long term government bonds in the Eurozone since the inception of the Euro in 1999. While it is commonly assumed that markets for EMU government bonds were closely integrated prior to the EMU debt crisis, we find that there is significant time variation in their relationship. There are periods of integration and disintegration, and differences between core and periphery countries can be observed long before the EMU debt crisis. To obtain insights into the sources of the observed time variation, we analyze the dependence on variables related to market sentiment, risk and risk aversion. The drivers of market integration are found to be similar to those for the well documented flight-to-quality effects from stocks to bonds, suggesting that in times of crisis investors do not only shift their portfolios from stocks to bonds, but there is also a stronger differentiation between more and less risky bonds. The persistence of these differentials leads to the conclusion that (at least in times of crisis) the pricing of EMU government bonds implied the possibility of macroeconomic and fiscal divergence between the EMU countries.
    Keywords: EMU Debt Crisis; Flight-to-quality; Fractional Cointegration; Market Integration; Yield Spreads
    JEL: G01 C32 C14 C58 E43
    Date: 2018–01
  4. By: Brzustowski, Thomas; Petrosky-Nadeau, Nicolas; Wasmer, Etienne
    Abstract: We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In these three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of the total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: most variation in unemployment comes from the speed of matching in the labor market.
    Keywords: search; matching; financial frictions; good frictions
    JEL: R14 J01 F3 G3
    Date: 2016–06–14
  5. By: Martin Kahanec
    Abstract: The economic literature starting with Borjas (2001) suggests that immigrants are more flexible than natives in responding to changing sectoral, occupational, and spatial shortages in the labor market. In this paper, we study the relative responsiveness to labor shortages by immigrants from various origins, skills and tenure in the country vis-à- vis the natives, and how it varied over the business cycle during the Great Recession. We show that immigrants in general have responded to changing labor shortages across EU member states, occupations and sectors more fluidly than natives. This effect is especially significant for low-skilled immigrants from the new member states or with the medium number of years since immigration, as well as with high-skilled immigrants with relatively few (1-5) or many (11+) years since migration. The relative responsiveness of some immigrant groups declined during the crisis years (those from Europe outside the EU or with eleven or more years since migration), whereas other groups of immigrants became particularly fluid during the Great Recession, such as those from new member states. Our results suggest immigrants may play an important role in labor adjustment during times of asymmetric economic shocks, and support the case for well-designed immigration policy and free movement of workers within the EU. Paper provides new insights into the functioning of the European Single Market and the roles various immigrant groups play for its stabilization through labor adjustment during times of uneven economic development across sectors, occupations, and countries.
    Keywords: immigrant worker, labor supply, skilled migration, labor shortage, wage regression, Great Recession
    JEL: J24 J61 J68
    Date: 2018–01–19
  6. By: Isabel Argimón (Banco de España)
    Abstract: This paper analyses the effects of decentralized multinational banks, characterized by the large autonomy of the affiliates that the banking group has abroad, on bank’s risk, using Spanish confidential supervisory data. Having activity abroad, in countries whose business and financial cycles may be less than perfectly correlated with those of the home country can generate more stability in the results of the consolidated banking group. Such isolation should be greater for multinational and decentralized banks. On the other hand, the international activity of banks may be associated to more risk taking as distance can hinder the ability of a bank’s headquarters to monitor its subsidiaries or because of the more limited knowledge of the host country that the group has. Which effect dominates is an empirical matter which could be taken into account in capital requirements and when carrying out stress-tests. We provide empirical evidence of the relevance of the model of entry into foreign markets, international geographic diversification and business co-movements between the Spanish and the host economy on bank’s ex-post risk. The results are consistent with the hypothesis that geographic diversification reduces risk.
    Keywords: financial crises, geographic diversification, bank regulation, banking, risk
    JEL: G21 G28 G01 F40
    Date: 2017–12
  7. By: Cristina Arellano; Yan Bai; Sandra Lizarazo
    Abstract: We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders’ pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
    JEL: F3 G01
    Date: 2017–11
  8. By: Óscar Arce (Banco de España); Ricardo Gimeno (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: We analyse how the European Central Bank’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish nonfinancial firms. Our results show that the announcement of the CSPP in March 2016 significantly raised firms’ propensity to issue CSPP-eligible bonds. The flipside was a drop in the demand for bank loans by these firms. This drop in the demand for credit by bondissuers, which are usually large corporations, unchained a positive and significant side effect on the flow of new loans extended to – typically smaller – firms that do not issue bonds. Specifically, we find that around 78% of the drop in loans previously given to bond issuers was redirected to other companies, which led them to raise investment. This reallocation of credit was amplified by the ECB’s Targeted Longer Term Refinancing Operations (TLTRO).
    Keywords: unconventional monetary policy, Corporate Sector Purchase Programme, quantitative easing, portfolio rebalancing
    JEL: E44 E52 E58 G2 G12 G15
    Date: 2017–12
  9. By: Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CESifo, Munich; IOS, Regensburg)
    Abstract: We provide comprehensive evidence of the widespread occurrence of inflation convergence between all countries of the European Union from 1999 to 2016. We also show that convergence was more inclusive in the years after the global financial crisis—including the European sovereign debt crisis and the period of zero lower bound—and that price-stabilityoriented monetary strategies might have in fact facilitated this convergence. Our results are robust with respect to the use of three inflation benchmarks (the cross-sectional average, the inflation target of the European Central Bank, and the Maastricht criterion), structural breaks, and a core inflation measure. Our main findings imply that further enlargement of the euro area is feasible from the perspective of the convergence of inflation rates between the countries of the European Union.
    Keywords: inflation convergence, European Union, global financial crisis, zero lower bound, monetary strategy
    JEL: C32 E31 E58 G01 K33
    Date: 2017–11
  10. By: Enrique Moral-Benito (Banco de España); Francesca Viani (Banco de España)
    Abstract: This paper aims to identify how much of the recent current account adjustment in Spain can be explained by cyclical factors. For this purpose, we consider the cross-country regressions in the IMF’s External Balance Assessment (EBA) methodology but allowing for country-specific slopes and intercepts. The good fit of these regressions implies negligible residuals for most countries, and, as a result, the positive analysis of current account decompositions provides a more informative assessment of the external balance drivers. According to our findings, around 60% of the 12 pp. adjustment of the Spanish external imbalance over the 2008-2015 period can be explained by transitory factors such as the output gap, the oil balance, and the financial cycle. The remaining 40% is explained by factors such as the cyclically-adjusted fiscal consolidation, population aging, lower growth expectations, or competitiveness gains, which can all be considered as more permanent phenomena.
    Keywords: current account, global imbalances
    JEL: F21 F32 F41
    Date: 2017–10
  11. By: Roberto Censolo; Caterina Colombo
    Abstract: In this paper we investigate the co-movements between the R&D share of total investment and GDP growth in different EU areas over the period 1999-2014. Our empirical analysis shows that only core countries display a common counter-cyclical mechanism leading to an increased share of R&D over prolonged downturns. The lack of any counter-cyclical pattern of R&D share over the evolution of GDP growth in periphery countries makes this area highly vulnerable to persistent recessions, with potentially harmful consequences for longer term growth. For recent EU members the evidence of R&D share pro-cyclicality should be evaluated in the light of the catching-up process still at work in this area. Our analysis suggests that any successful EU innovation policy should not disregard the potential divergence in R&D performance due to the dispersion of the counter-cyclical properties of the share of productivity enhancing activities in the different EU areas.
    Keywords: R&D investment; cyclicality; European Union; economic crisis
    JEL: O52 O30 E32
    Date: 2017–12–27
  12. By: Anja Kukuvec; Harald Oberhofer (WIFO)
    Abstract: This paper empirically investigates the propagation of business sentiment within the EU and adds to the literature on shock absorption via a common market's real economy. To this end, we combine EU-wide official business sentiment indicators with world input-output data and information on indirect wage costs. Econometrically, we model interdependencies in economic activities via input-output linkages and apply space-time models. The resulting evidence provides indication for the existence of substantial spillovers in business sentiment formation. Accordingly, and highlighted by the estimated impacts of changes in indirect labour costs, policy reforms aiming at increasing the resilience of the European single market need to take these spillovers into account in order to increase its effectiveness.
    Keywords: Business sentiment, propagation, economic fluctuations, input-output linkages, networks, space-time model, policy reforms
    Date: 2018–01–19
  13. By: Giovanni Dosi; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
    Abstract: In this work we develop a set of labour market and fiscal policy experiments upon the labour and credit augmented "Schumpeter meeting Keynes" agent-based model. The labour market is declined under two institutional variants, the "Fordist" and the "Competitive" set-ups meant to capture the historical transition from the Fordist toward the post "Thatcher-Reagan" period. Inside these two regimes, we study the different effects of supply-side active labour market policies (ALMPs) vs. demand-management passive labour market ones (PLMPs). In particular, we analyse the effects of ALMPs aimed at promoting job search, and at providing training to unemployed people. Next, we compare the effects of these policies with unemployment benefits simply meant to sustain income and therefore aggregate demand. Considering the burden of unemployment benefits in terms of public budget, we link such provision with the objectives of the European Stability and Growth Pact. Our results show that (i) an appropriate level of skills is not enough to sustain growth when workers face adverse labour demand; (ii) supply-side policies are not able to reverse the perverse interaction between flexibility and austerity; (iii) PLMPs outperform ALMPs in reducing unemployment and workers' skills deterioration; and (iv) demand-management policies are better suited to mitigate inequality and to improve and sustain long-run growth.
    Keywords: Industrial-relation Regimes, Flexibility, Active Labour Market Policies, Austerity, Agent-based models
    Date: 2018–01–09
  14. By: Lucia, Alessi (European Commission – JRC); Giuseppina, Cannas (European Commission - JRC); Sara, Maccaferri (European Commission - JRC); Marco, Petracco Giudici (European Commission - JRC)
    Abstract: In November 2015, the European Commission adopted a legislative proposal to set up a European Deposit Insurance Scheme (EDIS), a single deposit insurance system for all bank deposits in the Banking Union. JRC was requested to quantitatively assess the effectiveness of introducing a single deposit insurance scheme and to compare it with other alternative options for the set-up of such insurance at European level. JRC compared national Deposit Guarantee Schemes and EDIS based on their respective ability to cover insured deposits in the face of a banking crisis. Analyses are based upon the results of the SYMBOL model simulation of banks’ failures.
    Keywords: banking regulation; banking crisis; deposit insurance
    JEL: C15 G01 G21 G28
    Date: 2017–12
  15. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CESifo, Munich; IOS, Regensburg); Michala Moravcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We analyze time-varying exchange rate co-movements and volatility spillovers between the Czech koruna, the Polish zloty, the Hungarian forint and the dollar/euro from 1999 to 2016. We apply the dynamic conditional correlations (DCC) model and the Diebold Yilmaz spillover index to examine the periods prior to and during the GFC, plus during and after the EU debt crisis. We found declining conditional correlations between new EU exchange rates prior to both crises. During the GFC and the European debt crisis, the correlations reach the lowest level, and increase afterwards. Based on the DCC model results we calculate portfolio weights and hedge ratios. We show that during both crises portfolio diversification benefits increase but hedging costs rise as well. Based on the spillover index we document that during calm periods most of the volatilities are due to each currency’s own history. However, during the distress periods volatility spillovers among currencies increase substantially.
    Keywords: Exchange rate, New EU forex markets, volatility, DCC model, volatility spillover index, EU debt crisis, global financial crisis
    JEL: C52 F31 F36 G15 P59
    Date: 2017–11
  16. By: Bernadette Biatour; Chantal Kegels; Jan van der Linden; Dirk Verwerft
    Abstract: Belgian government investment, and specifically the part spent on infrastructure, is relatively low both in historical terms and compared to neighbouring countries. A simulation with the European Commission's Quest III model suggests that increasing government investment permanently by 0.5% of GDP leads to a growth in GDP, private consumption and private investment. The impact of alternative financing mechanisms is compared. Finally, a budget neutral shift of investment in favour of infrastructure is found to yield significant benefits in terms of GDP and its main components already in the medium run.
    Keywords: Public investment, Infrastructure, Public finance, General equilibrium, Simulation
    JEL: E27 E62 H54
    Date: 2017–01–26
  17. By: Palea, Vera; Biancone, Paolo Pietro (University of Turin)
    Abstract: The worldwide recession caused by the financial market crisis has raised widespread criticism on free stock market-based capitalism, highlighting the need for alternative ways of doing business. In the European Union, economists and institutions have begun to look back at industrial policies to implement a new way of doing business based on economic and social sustainable development, which is one of the founding principles of the European Union. This being the context, this paper discusses financial reporting regulation within the uniqueness of the EU institutional context and examines the consistency of IFRS adoption with the EU societal objectives. Specifically, the paper examines IFRS capability to support economic and social sustainable development. In doing this, not only does it provide regulators with a post-implementation overall assessment of IFRS adoption in the European Union but also with some guidance for future endorsement.
    Date: 2017–10

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