nep-eec New Economics Papers
on European Economics
Issue of 2018‒02‒26
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Equilibrium Real Interest Rates, Secular Stagnation, and the Financial Cycle: Empirical Evidence for Euro-Area Member Countries By Ansgar Belke; Jens Klose
  2. Patterns of convergence (divergence) in the euro area: profitability versus cost and price indicators By Monica Amici; Emmanuele Bobbio; Roberto Torrini
  3. Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices By Imran Hussain Shaha; Simón Sosvilla-Rivero
  4. Nonfinancial debt and economic growth in euro-area countries By Marta Gómez-Puig; Simón Sosvilla-Rivero
  5. Productivity growth in Italy: a tale of a slow-motion change By Matteo Bugamelli; Francesca Lotti; Monica Amici; Emanuela Ciapanna; Fabrizio Colonna; Francesco D’Amuri; Silvia Giacomelli; Andrea Linarello; Francesco Manaresi; Giuliana Palumbo; Filippo Scoccianti; Enrico Sette
  6. How effective are sovereign bond-backed securities as a spillover prevention device? By David Cronin; Peter G. Dunne
  7. ECB interventions in distressed sovereign debt markets: The case of Greek bonds By Trebesch, Christoph; Zettelmeyer, Jeromin
  8. Wage growth in the euro area: where do we stand? By Guido Bulligan; Elisa Guglielminetti; Eliana Viviano
  9. Public investment in R&D in reaction to economic crises: A longitudinal study for OECD countries By Pellens, Maikel; Peters, Bettina; Hud, Martin; Rammer, Christian; Licht, Georg
  10. Structural change and female participation in recent economic growth: A multisectoral analysis for the Spanish economy. By Rosa Duarte; Cristina Sarasa; Mònia Serrano
  11. Electoral spillovers in an intertwined world: Brexit effects on the 2016 Spanish vote By Agelos Delis; Konstantinos Matakos; Dimitrios Xefteris
  12. New version of the quarterly model of Banco de España (MTBE) By Ana Arencibia Pareja; Samuel Hurtado; Mercedes de Luis López; Eva Ortega
  13. Financial stability in the EU: A case for micro data transparency By Kasinger, Johannes; Pelizzon, Loriana
  14. The global financial cycle, bank capital flows and monetary policy. Evidence from Norway By Ragna Alstadheim; Christine Blandhol
  15. The effect of unconventional monetary policy on inflation expectations: evidence from firms in the United Kingdom By Boneva, Lena; Cloyne, James; Weale, Martin; Wieladek, Tomasz
  16. Effectiveness of unconventional monetary policies in a low interest rate environment By Andrew Filardo; Jouchi Nakajima
  17. What does the heterogeneity of the inflation expectations of Italian firms tell us? By Laura Bartiloro; Marco Bottone; Alfonso Rosolia

  1. By: Ansgar Belke; Jens Klose
    Abstract: Is the Euro area as a whole, or are individual Euro-area member countries facing a period of sustained lower economic growth, a phenomenon known as secular stagnation? We tackle this question by estimating equilibrium real interest rates and comparing them to actual real rates. Since the financial crisis has altered the degree of leverage in several European economies, we expand our model to incorporate the financial cycle. We estimate the model for the Euro area as a whole and for nine Euro-area member countries. Incorporating the financial cycle changes the estimated equilibrium real interest rates: For some of Euro-area member countries, estimates of the equilibrium real interest rate are substantially higher than the standard estimates. In other cases, including our estimates for the Euro area as a whole, the estimated equilibrium real rates are slightly lower than without taking the financial cycle into account but are still higher than the actual rates. This indicates that real monetary policy rates were set even more systematically and consistently below (or not as far above) the natural real rate. Comparing the sequence of actual and equilibrium real rates, only Belgium, France, and Greece are likely to face a period of secular stagnation.
    Keywords: equilibrium real interest rate, secular stagnation, euro-area countries, heterogeneity
    JEL: E43 C32
    Date: 2018–01
  2. By: Monica Amici (Bank of Italy); Emmanuele Bobbio (Bank of Italy); Roberto Torrini (Bank of Italy)
    Abstract: We analyse patterns of convergence (divergence) across euro-area countries in manufacturing since monetary union and find that not only costs, but also profitability have followed divergent paths. We further find that profitability developments only partially overlap with those of unit labour costs and producer prices, more extensively studied in the literature. Considering the largest countries, profitability in manufacturing in Germany and Spain has risen by comparison with non-tradables and with respect to France and Italy, where profit margins in manufacturing have declined and have lost ground with respect to the non-tradable sector. We show that these developments are correlated to the relative export performance of these countries. This correlation also holds in a two digit sector-level panel analysis, comprising all the euro-area countries that first entered the monetary union. This is consistent with the recent international trade literature, according to which successful exporting firms, which are more efficient or produce better products, also charge higher mark-ups. Turning to Italy, after a protracted decline both export shares and profit margins in manufacturing have improved in recent years, which is consistent with a recovery in external competitiveness.
    Keywords: euro area, profit shares, profit margins, export shares, unit labour costs
    JEL: D33 D4 J3 L1 F10
    Date: 2017–12
  3. By: Imran Hussain Shaha (Department of Economics, University of Bath, Bath, UK.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.
    Keywords: Stock prices; House prices; Inflation targeting; Macroeconomic stabilization; Euro area.
    JEL: C32 D53 E31 E52 E58 G12 O52 R31
    Date: 2017
  4. By: Marta Gómez-Puig (Universitat de Barcelona, Department of Economics and Riskcenter. 08034 Barcelona, Spain.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: In this paper we analyse the effects of all sources of the accumulation of nonfinancial debt (household, corporate as well as government) on economic growth in ten euro-area countries during the 1980-2015 period. To this end, we make use of three models (a baseline, an asymmetric and a threshold model) based on the empirical growth literature augmented by debt to assess whether a debt change has an impact on growth over and above other determinants, treating the different types of borrowers separately. By exploring the time series dimension in order to properly account for the historical experience of each country in the sample, we aim to detect potential heterogeneities in the relationship across euro area countries. Our results with both the baseline and the asymmetric models suggest that although the effects on nonfinancial debt accumulation clearly differ across countries, on average, the highest marginal impact of a rise in debt corresponds to the household and public sector, with an increase in private debt being more harmful in peripheral than in central countries; in contrast, the average effect of a rise in public debt does not differ between these two groups of countries. As for the effects of a debt increase beyond the turning point estimated in the threshold model, our findings indicate that the highest marginal impact corresponds to the household sector.
    Keywords: Public debt; Household debt; Nonfinancial corporate debt; Economic growth; Heterogeneity; Euro area; Peripheral EMU countries; Central EMU countries.
    JEL: C22 D12 F33 H63 O16 O40 O52
    Date: 2017
  5. By: Matteo Bugamelli (Bank of Italy); Francesca Lotti (Bank of Italy); Monica Amici (Bank of Italy); Emanuela Ciapanna (Bank of Italy); Fabrizio Colonna (Bank of Italy); Francesco D’Amuri (Bank of Italy); Silvia Giacomelli (Bank of Italy); Andrea Linarello (Bank of Italy); Francesco Manaresi (Bank of Italy); Giuliana Palumbo (Bank of Italy); Filippo Scoccianti (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: Productivity is the main factor holding back long-term economic growth in Italy. Since the second half of the 1990s, productivity growth has been feeble both by historical standards and compared with the other main euro area countries. Understanding the reasons for such a performance and finding the most effective policy levers is crucial to increase Italy’s potential growth rate. Against this background, we provide a detailed analysis of the data and a critical review of the available empirical evidence to identify both the structural weaknesses limiting productivity growth and the strengths of the Italian productive system that may support it looking forward. Since the end of the 1990s and more intensively since the second half of 2011, the reform effort has been particularly effective in the regulation of product and labor markets and industrial policy. On other factors which are very relevant for productivity dynamics, the reform action has been less effective so far.
    Keywords: productivity, growth, business dynamics, innovation, human capital, labor, finance, regulation, policies
    JEL: D0 E0 F0 G0 H0 J08 K0 L0
    Date: 2018–01
  6. By: David Cronin; Peter G. Dunne
    Abstract: Brunnermeier et al. (2017) propose the introduction of sovereign bond-backed securities (SBBS) in the euro area. That and other papers assess how the securitisation would insulate senior bond holders from actual default-related losses. This paper generalises the assessment by using the VAR-based Diebold and Yilmaz (2012) spillover index methodology to assess potential attenuation of the spillover of shocks in holding-period returns across bond markets due to the introduction of SBBS. This is made possible by employing SBBS yields estimated from historical euro area member state sovereign bond yields using Monte Carlo methods, as described in Sch¨nbucher (2003). A lower spillover o of shocks between SBBS securities compared to what arises between eleven member states’ bond markets is observed. Spillover values fall during the euro area sovereign bond crisis. Gross and net spillovers are lower for a 70-30 tranching than for a 70-20-10 case but in both cases the senior tranche becomes more insulated from shocks in the more junior tranches during periods of financial stress. JEL Classification: C58, G11, G12, G17
    Keywords: Safe Assets; Sovereign Bond Securitisation; Bank-Sovereign Diabolic Loop
    Date: 2018–01
  7. By: Trebesch, Christoph; Zettelmeyer, Jeromin
    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
  8. By: Guido Bulligan (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Eliana Viviano (Bank of Italy)
    Abstract: One of the key questions about the current economic recovery in the euro area is why the decline in unemployment recorded since the second half of 2013 has been accompanied by subdued growth in nominal wages. In this paper we adopt a Phillips curve framework to assess whether alternative indicators of labour market slack can explain the current modest wage dynamics in the euro area and in its five largest economies. Our results suggest that the intensive margin of labour utilization plays a relevant role in wage growth: our estimates indicate that the shape of the Phillips curve becomes flatter for lower levels of hours per worker, implying that wage growth is less responsive to unemployment. Looking ahead, a significant recovery in the intensive margin appears key to achieve a robust increase in nominal wage growth.
    Keywords: wage growth, Phillips curve, intensive margin
    JEL: E24 E31 J21
    Date: 2017–12
  9. By: Pellens, Maikel; Peters, Bettina; Hud, Martin; Rammer, Christian; Licht, Georg
    Abstract: The paper investigates the reaction of public R&D spending on economic crises. We are interested in two counteracting motives: On the one hand, public R&D spending can be seen as a means to fight the crisis, and governments may decide to increase their R&D budgets. On the other hand, a crisis reduces public income and urges governments to cut spending, which may negatively affect public R&D budgets. Using panel data from 26 OECD countries over the period 1995 to 2015, we investigate how public R&D expenditure changes over the business cycle for different types of government R&D expenditure. On average, we find evidence for a strong pro-cyclical effect on public R&D investments. But country heterogeneity matters. Whereas European innovation leaders and non-EU countries pursue a counter-cyclical strategy, innovation followers and moderate innovators behave pro-cyclical. This leads to an increasing innovation gap in Europe. Short-run and long-run financing conditions (budget surplus and government debt levels) also significantly affect public R&D spending. However, there is no evidence that economic crises systematically affect the composition of public R&D spending along different thematic areas or by beneficiaries.
    Keywords: public R&D expenditure,economic crisis,OECD,panel data
    JEL: H54 H12 H61
    Date: 2018
  10. By: Rosa Duarte (Universidad de Zaragoza); Cristina Sarasa (Universidad de Zaragoza); Mònia Serrano (Universitat de Barcelona)
    Abstract: Economic growth has different impacts on gender gaps. Despite that the incorporation of women into the labour market drove towards a convergence with male participation in recent decades, a notable gender pay gap still persists standing at around 15% on average in the European Union. In this context, this paper evaluates the impact of economic growth patterns on the evolution of female employment and gender pay gaps. As a case study, we examine Spanish economic growth from 1980 to 2007 and the influences on the size, composition (by skill), and distribution (by sector) of female and male employment, as well as the consequences for gender gaps. First, sectorial feminization, direct discrimination, and structural change factors are identified and evaluated as sources of change in gender pay gap. Second, we explore the influence of demand, technology, and intensity factors on the evolution of employment in Spain, combining gender, skill, sectorial, and temporal perspectives.
    Keywords: Female participation, Gender pay gap, Structural change, Structural decomposition analysis, Input-output analysis.
    JEL: A30 B54 C67 E24
    Date: 2018
  11. By: Agelos Delis; Konstantinos Matakos; Dimitrios Xefteris
    Abstract: The Brexit vote took place three days before the June 26, 2016, Spain’s parliamentary elections, in which anti-systemic parties performed worse compared to the previous elections (December 2015) despite the optimistic predictions of the pre-election polls and the surge in the support for anti-systemic parties that was taking place elsewhere (Hobolt and de Vries 2016). We split the Spanish votes in local ones (casted after Brexit) and postal ones (casted before Brexit) and –by employing a differences-in-differences model a la Montalvo (2011)—we provide causal evidence suggesting that the electoral performance of the anti-systemic parties deteriorated due to the uncertainty and fear of destabilization caused to the Spanish electorate by the Brexit vote.
    Keywords: Brexit; Spanish elections; electoral spillovers; natural experiment; uncertainty; anti-systemic parties
    Date: 2018–02
  12. By: Ana Arencibia Pareja (Banco de España); Samuel Hurtado (Banco de España); Mercedes de Luis López (Banco de España); Eva Ortega (Banco de España)
    Abstract: The Quarterly Model of Banco de España (MTBE, Modelo Trimestral del Banco de España), is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for performing scenario simulations. The model is specified as a large set of error correction equations, and, especially in the short run, is mostly demand driven. This paper presents an update of the model, estimated with data from 1995 to 2014. In this iteration, a big revamp to the econometric techniques used in estimation has been implemented. Despite that, changes in coefficients and simulation results with respect to the previous version of the model are smaller than what we saw in earlier updates. Compared with MTBE-2014, this new version (MTBE-2017) shows less response of demand to interest rates and stock market prices but more to credit, less response of GDP to world demand but more to world prices and to the price of oil, more positive effects to output and employment from price and wage moderation, and slightly faster and bigger fiscal multipliers for some shocks (government consumption and investment, direct taxes to households) but smaller for others (indirect taxes, direct taxes to firms).
    Keywords: Spanish economy, macroeconometric model
    JEL: E10 E17 E20 E60
    Date: 2017–12
  13. By: Kasinger, Johannes; Pelizzon, Loriana
    Abstract: Even if the importance of micro data transparency is a well-established fact, European institutions are still lacking behind the US when it comes to the provision of financial market data to academics. In this Policy Letter we discuss five different types of micro data that are crucial for monitoring (systemic) risk in the financial system, identifying and understanding inter-linkages in financial markets and thus have important implications for policymakers and regulatory authorities. We come to the conclusion that for all five areas of micro data, outlined in this Policy Letter (bank balance sheet data, asset portfolio data, market transaction data, market high frequency data and central bank data), the benefits of increased transparency greatly offset potential downsides. Hence, European policymakers would do well to follow the US example and close the sizeable gap in micro data transparency. For most cases, relevant data is already collected (at least on national level), but just not made available to academics for partly incomprehensible reasons. Overcoming these obstacles could foster financial stability in Europe and assure level playing fields with US regulators and policymakers.
    Keywords: micro data transparency,financial stability,financial market data
    Date: 2018
  14. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Christine Blandhol (University of Chicago and Statistics Norway)
    Abstract: We investigate the importance of a global financial cycle for gross capital inflows based on monthly balance sheet data for Norwegian banks. The VIX index has been interpreted as an “investor fear gauge” and associated with a global financial cycle. This index has also been found to impact real activity. We include both a global activity variable and the VIX index in our structural VAR model of capital inflows. We find that when global activity falls, banks’ foreign funding share falls. Our results suggest that global real activity rather than a global financial cycle is a main driver behind the volume of bank capital inflows. We also study domestic monetary policy and implications for capital flows. Domestic monetary policy helps absorb VIX shocks and there is no indication of procyclical (“carry trade”) effects on funding. Monetary policy affects activity and inflation in a standard fashion, and the exchange rate acts as a buffer when shocks hit the economy.
    Keywords: Bank Capital flows, Uncertainty-shocks, Structural VAR
    JEL: E32 E44 F32 G15
    Date: 2018–02–19
  15. By: Boneva, Lena (Monetary Policy Committee Unit, Bank of England); Cloyne, James (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper investigates the effect of quantitative easing (QE) and other unconventional monetary policies on inflation and wage expectations of UK manufacturing firms. To identify the effect of QE on firms’ expectations, we use a novel approach of combining microeconometric data with macroeconomic shocks: QE is exogenous to inflation expectations of individual firms, and so are other macroeconomic developments like aggregate inflation or GDP growth. We find that firms’ inflation expectations increase by 0.22 percentage points in response to £50 billion of QE, implying that inflation expectations are part of the transmission mechanism of QE. In contrast, we find a positive but small and insignificant effect of forward guidance on inflation and wage expectations.
    Keywords: Inflation expectations; firm survey data; unconventional monetary policy; quantitative easing
    JEL: D22 E31 E52
    Date: 2016–07–21
  16. By: Andrew Filardo; Jouchi Nakajima
    Abstract: Have unconventional monetary policies (UMPs) become less effective at stimulating economies in persistently low interest rate environments? This paper examines that question with a time-varying parameter VAR for the United States, the United Kingdom, the euro area and Japan. One advantage of our approach is the ability to measure an economy's evolving interest rate sensitivity during the post-GFC macroeconomy. Another advantage is the ability to capture time variation in the "natural", or steady state, rate of interest, which allows us to separate interest rate movements that are associated with changes in the stance of monetary policy from those that are not.
    Keywords: lending rate, quantitative easing, time-varying parameter VAR model, unconventional monetary policy
    JEL: E43 E44 E52 E58
    Date: 2018–01
  17. By: Laura Bartiloro (Bank of Italy); Marco Bottone (Bank of Italy); Alfonso Rosolia (Bank of Italy)
    Abstract: Quite a lot. We investigate how the cross-sectional heterogeneity of firms’ inflation expectations reflects information availability and awareness of recent macroeconomic developments, observable firm characteristics and broader macroeconomic developments using the Bank of Italy’s survey on businesses’ inflation and growth expectations. We find that: on average about half of the dispersion of expectations is traceable to a lack of information about the most recent price developments; firms incorporate new information into their expectations within a quarter; the dispersion of expectations is related in a statistically significant way to some important aggregate economic variables, and it is greater when current inflation is farther away from the ECB’s price stability goal. Since 2015 the weight attributed to prior beliefs of low inflation has steadily increased and the uncertainty surrounding them has decreased. Furthermore, since 2014 there has no longer been an empirical connection between the dispersion of expectations and the distance from the ECB price stability. These two facts suggest an increased risk of inflation expectations being de-anchored."
    Keywords: Inflation Expectations, Learning, Firms
    JEL: D22 D8 E31
    Date: 2017–12

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