nep-eec New Economics Papers
on European Economics
Issue of 2018‒02‒05
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Exchange Rate Volatility and Exports in the run-up to the EMU accession By Łukasz Goczek; Dagmara Mycielska
  2. Bank Asset Quality & Monetary Policy Pass-Through By Byrne, David; Kelly, Robert
  3. ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds By Jeromin Zettelmeyer; Christoph Trebesch
  4. A Welfare Analysis of Macroprudential Policy Rules in the Euro Area By Jean-Christophe Poutineau; Gauthier Vermandel
  5. Business cycle patterns in European regions By Gomez-Loscos, Ana; Gadea, M. Dolores; Bandres, Eduardo
  6. Fiscal devaluation and economic activity in the EU By Piotr Ciżkowicz; Bartosz Radzikowski; Andrzej Rzońca; Wiktor Wojciechowski
  7. Do Corporate Income Tax Rates Cuts Create Jobs? The European Experience By Antonio Estache; Brigitta Gersey
  8. Determinants of low inflation in an emerging, small open economy. A comparison of aggregated and disaggregated approaches By Karol Szafranek; Aleksandra Hałka
  9. The gains from economic integration By Davod Comerford; Jose V Rodriguez Mora
  10. Earmarked Revenues: How the European Union Can Learn from US Budgeting Experience By Jacob Funk Kirkegaard
  11. Occupational Licensing in the European Union: Coverage and Wage Effects By Koumenta, Maria; Pagliero, Mario
  12. Brexit and Uncertainty in Financial Markets By Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani

  1. By: Łukasz Goczek (University of Warsaw); Dagmara Mycielska (University of Warsaw)
    Abstract: According to theory of monetary integration, lower exchange rate variability is believed to be the main positive effect of a common currency. However, empirical studies do not confirm this negative and significant impact of exchange rate volatility on trade. In this report, we analyze the relationship between the exchange rate volatility and the export performance of Central and Eastern European non-euro EU countries: Poland, Czechia, Hungary, and Romania. We use monthly frequency data on export flows to the euro area and the European Union. The sample covers the period from 2000M1 till 2015M6 and we control for the financial crisis of 2008-2009 when exchange rate variability increased considerably. We measure exchange rate volatility using traditional standard deviation approach and GARCH models. The main hypothesis is verified using both aggregated data and sectoral trade data. The effects of euro exchange rate volatility on Polish trade are explored with more focus by estimating a series of vector error correction models and by assessing impulse-response functions. For the panel data estimation, we employ second generation dynamic panel cointegration model with PMG estimator. The results suggest that the elimination of the exchange rate volatility through euro adoption will not necessarily increase the export performance of the countries integrating with the euro area.
    Keywords: exchange rate volatility, exports, EMU, GARCH, cointegration, PMG estimator
    JEL: F14 F15
    Date: 2017
  2. By: Byrne, David (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland)
    Abstract: The funding mix of European firms is heavily weighted towards bank credit, underscoring the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank level data over the period 2008-2014, we empirically test the implications of the model, with results showing that asset quality, measured through a one percentage point increase in the impairment ratio have a significant negative impact, lowering immediate pass-through by 3 per cent. For impairment rates greater than 17 per cent, we find that pass-though is not significantly different from zero. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of NPLs over impaired loans. We show it played a significant role in the fragmentation of euro area pass-through post-crisis.
    Keywords: Monetary Policy Pass-through, Impaired Loans, Non-Performing Loans, Interest Rates
    JEL: D43 E51 E52 E58 G21
    Date: 2017–12
  3. By: Jeromin Zettelmeyer (Peterson Institute for International Economics); Christoph Trebesch (Kiel University)
    Abstract: We study central bank interventions in times of severe distress (mid-2010), using a unique bond-level dataset of ECB purchases of Greek sovereign debt. ECB bond buying had a large impact on the price of short and medium maturity bonds, resulting in a remarkable "twist" of the Greek yield curve. However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spillovers to close substitute bonds, CDS markets, or corporate bonds. Hence, our findings attest to the power of central bank intervention in times of crisis but also suggest that in highly distressed situations, this power may not extend beyond those assets actually purchased.
    Keywords: Central Bank Asset Purchases, Securities Markets Programme, Eurozone Crisis, Sovereign Risk, Market Segmentation
    JEL: E43 E58 F34 G12
    Date: 2018–01
  4. By: Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union-wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
    Abstract: A l'aide d'un modèle MEGIS estimé pour la zone euro tenant compte des différences économiques entre le coeur et la périphérie de la zone Euro, nous constatons que les mesures macroprudentielles conduites à l'échelle national mènent à des gains de bien-être importants par rapport à une règle de politique uniforme qui réagit aux développements financiers à l'échelle fédérale. Cependant, ces mesures macroprudentielles ne sont pas bénéfiques pour tous les participants: les gains de bien-être sont principalement obtenus pour les pays périphériques alors que les pays du coeur peuvent être perdants suite à la mise en place cette nouvelle politique de stabilité financière.
    Keywords: Macroprudential policy,Euro Area,Financial Accelerator,DSGE Two-Country Model,Bayesian Estimation
    Date: 2017
  5. By: Gomez-Loscos, Ana; Gadea, M. Dolores; Bandres, Eduardo
    Abstract: The aim of this paper is threefold. First, we analyze the comovements of the business cycles of European regions. Second, we date these business cycles, for the first time in the literature, and identify clusters of regions with similar business cycle behavior, using Finite Mixture Markov models. Third, we develop a new index to measure within-country homogeneity. We find that comovement among regions is, on average, quite low, although it increased during the convergence process prior to the euro cash changeover and after the onset of the Great Recession. We identify five different groups of European regions. We also find heterogeneity in the size of border effects.
    Keywords: Business cycle dating, comovements, clusters, regions, Finite Mixture Markov models.
    JEL: C32 E32 R11
    Date: 2018–01
  6. By: Piotr Ciżkowicz (Warsaw School of Economics); Bartosz Radzikowski (Center for Social and Economic Research); Andrzej Rzońca (Warsaw School of Economics); Wiktor Wojciechowski (Warsaw School of Economics)
    Abstract: In the aftermath of the global financial crisis, a fiscal devaluation (hereafter: FD), understood as a shift in taxation from labor to consumption, has been debated as a possible tool of restoring competitiveness in peripheral countries of the Euro area. We contribute to this debate. Based on a set of panel and spatial panel models for the EU 27 over the period 1995 – 2014, we find that FD increases value added in exports, improves net exports, accelerates GDP and employment growth, and decelerates labour costs growth. These effects are nonlinear: stronger in the members of the Euro area and weaker in countries with either more coordinated or more centralised wage bargaining process, or more generous unemployment benefits. Most importantly, FD turns out not to be a beggar thy neighbour policy, at least in the EU. In our sample ‘cooperative effect’ of unilateral FD, which is beneficial for neighbouring countries, dominates by far ‘competitive effect’, which goes at the expense of other countries’ competitiveness. Admittedly, FD implemented in one country can benefit other countries, provided that they are strongly integrated in global value chains. These findings are robust to changes in the estimation methods, the sample composition, the set of explanatory variables and the selection of a spatial weight matrix.
    Keywords: fiscal devaluation, fiscal policy, tax structure, economic growth, labor market institutions, panel data models, spatial panel data models
    JEL: C30 C33 E62 E63 E65 H30 H60 J32 J51
    Date: 2017
  7. By: Antonio Estache; Brigitta Gersey
    Abstract: The paper assesses the impact of changes in the effective corporate tax rate on the unemployment rate in Europe between 1999 and 2014. The results suggest, for this sample, that a 1% decrease in the effective tax rate was associated with a 0.34% increase in the unemployment rate on average. This means that, in the region, lower corporate income taxes were linked to the replacement of labor by capital. This this substitution effect has been stronger than the output effect conservative administrations tend to focus on in their motivation for the rates cut. The substitution may be needed to achieved longer run growth payoffs, but these results suggest that transition cost are likely to be paid by workers and these should be addressed jointly with the corporate tax cut decisions.
    Keywords: corporate taxation, unemployment rate, fixed effects, EU panel data
    Date: 2018–01
  8. By: Karol Szafranek (Narodowy Bank Polski, Warsaw School of Economics); Aleksandra Hałka (Narodowy Bank Polski)
    Abstract: We analyse the determinants of the protracted period of exceptionally low inflation in the emerging, small open economy of Poland. We consider a fairly standard set of macroeconomic variables and establish a structural VAR model estimated using Bayesian methods and disentangle the influence of the global and domestic, supply and demand factors affecting headline and core inflation by means of the mixture of zero and sign restrictions. Next, we extend the analysis on a battery of inflation components and construct inflation indices sensitive to the global and domestic factors. We find that the excessive disinflation has been primarily caused by the deteriorating domestic conditions whilst deflation has resulted from the convolution of waning global demand and plummeting oil prices. Disaggregated analysis corroborates the conclusion of the aggregated approach but reveals considerable heterogeneities in the sensitivity of inflation components to the identified shocks. We conclude that the disaggregated analysis brings important information for the monetary policy conduct.
    Keywords: low inflation, small open economy, Bayesian Vector Autoregression, sign restrictions
    JEL: C32 E31 E52
    Date: 2017
  9. By: Davod Comerford (Department of Economics, University of Strathclyde); Jose V Rodriguez Mora (University of Edinburgh, School of Economics)
    Abstract: This paper measures the effect of political integration, such as sharing a national state or economic union, on the degree of trade integration. Consistently with previous work, we find large border effects. However, such estimates may be biased and overestimate the effects of borders because of endogeneity: selection into sharing a political space is correlated with affinities for trade. We propose a method to address this and to estimate a causal effect. We then conduct speculative exercises showing the costs and benefits of the changing levels of integration associated with: the independence of Scotland, Catalonia and the Basque Country from the UK and Spain (but remaining within the European Union); the UK's exit from the EU; the break-up of the EU itself; and the achievement of frictions between members of the EU similar to those expected between regions of a single country. We find that the border effect between countries is an order of magnitude larger than the border effect associated with the European Union.
    Keywords: Border effect, trade, independence
    JEL: F15 R13
    Date: 2017–11
  10. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: New challenges facing the European Union—immigration pressures, the need to decrease security dependence on an increasingly erratic United States, and the United Kingdom's exit from the European Union (Brexit)—are compelling EU leaders to consider overhauling the revenue side of the European Union’s existing budget. To deal with these challenges in the future, the European Union will need resources—at a time when Europeans are increasingly skeptical about the effectiveness of budget-making in Brussels. Longstanding US budgetary procedures of trust fund accounting and earmarking government revenue towards specific priorities can provide a template for European policymakers. Shifting the EU budget towards more earmarked resources would reduce distrust among taxpayers by limiting Brussels’ spending discretion while focusing expenditures on specific challenges facing the European project.
    Date: 2018–01
  11. By: Koumenta, Maria; Pagliero, Mario
    Abstract: We present the first EU-wide study on the prevalence and labour market impact of occupational regulation in the EU. Drawing on a new EU Survey of Regulated Occupations, we find that licensing affects about 22 percent of workers in the EU, although there is significant variability across member states and occupations. On average, licensing is associated with a 4 percent higher hourly wages. Using decomposition techniques we show that rent capture accounts for one third of this effect and the remaining is attributed to signalling. We find considerable heterogeneity in the wage gains by occupation and level of educational attainment. Finally, occupational licensing increases wage inequality. After accounting for composition effects, licensing increases the standard deviation of wages by about 0.02 log points.
    Keywords: licensing; occupational regulation
    JEL: J31 J44
    Date: 2018–01
  12. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
    Abstract: This paper applies long-memory techniques (both parametric and semi-parametric) to examine whether Brexit has led to any significant changes in the degree of persistence of the FTSE 100 Implied Volatility Index (IVI) and of the British pound’s implied volatilities (IVs) vis-à-vis the main currencies traded in the FOREX, namely the euro, the US dollar and the Japanese yen. We split the sample to compare the stochastic properties of the series under investigation before and after the Brexit referendum, and find an increase in the degree of persistence in all cases except for the British pound-yen IV, whose persistence has declined after Brexit. These findings highlight the importance of completing swiftly the negotiations with the EU to achieve an appropriate Brexit deal.
    Keywords: Brexit, uncertainty, IVI index, British pound’s implied volatilities, financial markets
    JEL: C22 F30
    Date: 2018

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