nep-eec New Economics Papers
on European Economics
Issue of 2018‒03‒12
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. International monetary regimes and the German model By Scharpf, Fritz W.
  2. Back on Track? A micro-macro Narrative of Italian Exports By Matteo Bugamelli; Silvia Fabiani; Stefano Federico; Alberto Felettigh; Claire Giordano; Andrea Linarello
  3. Spillovers in Risk of Financial Institutions By John Cotter; Anita Suurlaht
  4. The impact of market structure of the banking sector on the growth of bank loans in the EU after the global financial crisis By Georgios Kouretas; Małgorzata Pawłowska
  5. Estimating the Trade and Welfare Effects of Brexit: A Panel Data Structural Gravity Model By Harald Oberhofer; Michael Pfaffermayr
  6. Correlation between Maltese and euro area sovereign bond yields By Reuben Ellul
  7. Unclogging the Credit Channel: on the Macroeconomics of Banking frictions By Jakucionyte, Egle; van Wijnbergen, Sweder
  8. EMU stability: Direct and indirect risk sharing By Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
  9. Fiscal stability during the great recesion: Putting decentralization design to the test. By Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
  10. Estimates of Fiscal Multipliers using MEDSEA By Noel Rapa
  11. Corporate Indebtedness and Low Productivity Growth of Italian Firms By Gareth Anderson; Mehdi Raissi
  12. Employment in Spanish regions: Cost control or growth-enhancing policies? By Roberto Bande; Marika Karanassou
  13. When central banks buy corporate bonds: : Target selection and impact of the European Corporate Sector Purchase Program By R.J. Galema; S. Lugo
  14. Decentralization and governance in Europe: Evidence from different expenditure components. By Andreas P. Kyriacou; Oriol Roca Sagalés
  15. Exports and labor costs: Evidence from a French Policy By Malgouyres, Clément; Mayer, Thierry
  16. The effect of fiscal announcements on interest spreads: Evidence from the Netherlands By Jasper de Jong

  1. By: Scharpf, Fritz W.
    Abstract: The end of the Bretton Woods regime and the fall of the Iron Curtain deepened the export orientation of the German model of the economy. Only after entry into the Monetary Union, however, did rising exports turn into a persistent export-import gap that became a problem for other eurozone economies. This Discussion Paper shows why the present asymmetric euro regime will not be able to enforce their structural transformation on the German model. Neither will German governments be able to respond to demands that would bring the performance of the German economy closer to eurozone averages. Instead, it is more likely that present initiatives for financial and fiscal risk sharing will transform the Monetary Union into a transfer union.
    Keywords: German model,export surpluses,currency regimes,Monetary Union,structural divergence,risk sharing,deutsches Modell,Exportüberschüsse,Währungsregime,Währungsunion,strukturelle Divergenz,Risikoteilung
    Date: 2018
  2. By: Matteo Bugamelli; Silvia Fabiani; Stefano Federico; Alberto Felettigh; Claire Giordano; Andrea Linarello
    Abstract: Between 1999 and 2016 – after the European Monetary System crisis of the mid-Nineties and the subsequent large swings among European currencies that ended with the adoption of the euro – Italy’s goods exports increased nearly twofold at current prices. Yet, they fared worse than foreign sales of the main euro-area competitors until 2007 (with the exception of France) and fell more intensely during the subsequent “Great Trade Collapse†. Only since 2010 signs of improvement have emerged: Italy’s exports have grown on average half a percentage point faster than the demand stemming from outlet markets and their share on world trade has remained broadly stable, after a protracted decline. Moreover, the negative growth gap vis-à -vis Germany has narrowed significantly. These facts raise two closely related questions. First, what are the main factors explaining Italy’s less favourable export performance relative to the other main euro-area countries since 1999? Second, are the recent signs of recovery the result of a successful structural adjustment of Italian firms or rather the fortuitous consequence of cyclical and hence temporary factors? Addressing these questions can help contribute to the debate on Italy’s structural weaknesses and persistently low productivity and GDP growth, as well as to gather some useful insights into Italy’s export outlook. We employ an extensive set of alternative indicators, based on multiple macro datasets as well as micro-data, to conduct an in-depth analysis of the dynamics of Italian goods exports since 1999, also exploiting the comparison with its three main euro-area competitors (France, Germany and Spain). We start by providing the aggregate picture and dig deeper into the geographical, sectoral and firm-level dimensions. We then analyse export determinants such as external demand, price and non-price competitiveness factors, including competition from emerging markets, the linkages between domestic demand on the one hand and financial and capacity constraints on the other hand. Finally, we try to map our descriptive evidence into a country-sector first and then a firm-level econometric exercise, in order to bridge the macro and the micro dimensions. We argue that the relatively unsatisfactory performance of Italian aggregate exports in the first sub-period, conveniently delimited by the inception of the euro and the eve of the global financial crisis (1999-2007), is the result of the interplay between three factors. The first is the significant appreciation of the real effective exchange rate for Italy, which compounded relative price dynamics and a nominal appreciation that were, on the whole, stronger than those of its main competitors, the latter owing to the different composition of trading partners across countries. These effects may also have been amplified by the higher exchange-rate elasticity of small exporters – as suggested by the literature and confirmed by our empirical findings – which in Italy have a relatively larger weight on aggregate exports. The second factor is the initial specialization in productions that were particularly exposed to the increasing competition of low-wage countries (China in particular) on world exports: we roughly estimate that this exposure could explain at least one tenth of the Italian under-performance on world markets relative to Germany. There is evidence of quality upgrading on the side of Italian exporters, possibly as a reaction to such competitive pressures, although not more pronounced than in the other main euro-area competitors. The third factor, which is intertwined with the previous two, is the size distribution of Italian firms and in particular the large number of small exporters, which struggled to: i) defend their exports in the face of the exchange rate appreciation; ii) keep pace with external demand; iii) successfully face competition from low-wage countries. In addition to these “domestic†factors, Italy’s relative export performance was further penalized by the exceptional growth in exports of both Germany, boosted by large price-competitiveness gains in turn also linked to exceptionally subdued wage dynamics, and Spain, in part favoured by the country’s initially limited penetration into world markets. Against the backdrop of these unfavourable developments before the crisis, over the recent six-year period, in a context of weak internal demand, Italian exports have significantly supported GDP growth and have outpaced the demand stemming from destination markets. Exporting firms have proved capable of adjusting to a shifting external environment more effectively than before and to brave the recessionary phase; they have also managed to reduce the negative growth differential vis-à -vis their main competitors, namely German exporters. To what extent do these facts signal a successful structural adjustment? On this, our evidence is mixed. On the one hand, cyclical or temporary factors may have been at play: price competitiveness was mainly helped by the nominal depreciation of the euro, although some relative-price adjustment vis-à -vis Germany was also in place, while favourable, possibly short-run, developments of world demand in specific sectors led to a positive contribution of Italy’s sectoral specialization. These positive effects were, however, partly counteracted by the cyclical weakness of domestic demand, especially in 2012-2013 against a backdrop of tight financial constraints, which exerted a drag on exports. On the other hand, the specialization of Italy’s exports shifted towards sectors (vehicles and pharmaceuticals) that are less exposed to competitive pressures stemming from Chinese producers, and towards productions that are particularly effective in activating domestic value added (food and beverages). Moreover, the selection process triggered by the exceptional difficulties encountered by micro and small firms both before and during the global financial crisis might have structurally strengthened the population of Italian exporters, making it more resilient to negative shocks and more capable of taking advantage of new opportunities.
    Keywords: exports, competitiveness, specialization, firm size
    JEL: F14 L11 L60
    Date: 2018–01
  3. By: John Cotter (University College Dublin); Anita Suurlaht (University College Dublin)
    Abstract: We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity.
    Keywords: macro-financial state variables, financial crisis, spillover effects, credit default swaps, real estate risk.
    JEL: G01 G15 G20
    Date: 2018–02–19
  4. By: Georgios Kouretas (Department of Business Administration, Athens University); Małgorzata Pawłowska (Warsaw School of Economics, Narodowy Bank Polski)
    Abstract: The aim of this research is to investigate the issue of asymmetry of the credit market determinants of bank loans (corporate, consumer, and residential mortgage loans) between the CEE-11 countries (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Rumania) and the other countries (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Spain, the Netherlands, Ireland, Luxembourg, Germany, Portugal, Sweden, United Kingdom, Malta, and Cyprus) after the global financial crisis (GFC) of 2007–09. For the analysis, we used annual bank-level data, which are collected from the Bankscope-Orbis database and interest rates for different loans from the European Central Bank and macroeconomic data on GDP growth. Panel data includes commercial banks, savings banks, and cooperative banks that were operating in the EU countries from the period 2010–2016. Using the methodology of panel regression, this study finds differences of the determinants of the growth of loans for two groups of countries after the global financial crisis. Panel data analysis of CEE-11 countries against other EU countries also finds differences between determinants of different types of bank loans.
    Keywords: banks, credit growth, concentration, foreign ownership, EU, CEE-11
    JEL: F36 G2 G21 G34 L1
    Date: 2018
  5. By: Harald Oberhofer; Michael Pfaffermayr
    Abstract: This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. The suggested Constrained Poisson Pseudo Maximum Likelihood Estimator exhibits some useful properties for trade policy analysis and allows to obtain estimates and confidence intervals which are consistent with structural trade theory. Assuming different counterfactual post-Brexit scenarios, our main findings suggest that UKs (EUs) exports of goods to the EU (UK) are likely to decline within a range between 7.2% and 45.7% (5.9% and 38.2%) six years after the Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic goods trade and trade with third countries, inducing a decline in UKs real income between 1.4% and 5.7% under the hard Brexit scenario. The estimated welfare effects for the EU are negligible in magnitude and statistically not different from zero.
    Keywords: constrained poisson pseudo maximum likelihood estimation, panel data, international trade, structural gravity estimation, trade policy, Brexit
    JEL: F10 F15 C13 C50
    Date: 2017
  6. By: Reuben Ellul (Central Bank of Malta)
    Abstract: This paper investigates correlation in Malta government stock (MGS) yields and assesses correlation between these yields and those of Malta’s major euro area partners. Correlation coefficients are found to be high, indicating the existence of a long-run relationship in the setting of MGS yields with short-term deviations. The analysis also includes an MGARCH-DCC(1,1) system based on spreads over the German ten-year bond, which are modelled for eleven euro area countries. Dynamic conditional correlations (DCCs) confirm that Maltese ten-year bond yields tend to be broadly insulated from event specific volatility in other countries’ yields. Simple ‘benchmark’ regressions are estimated over the period 2007 – 2016, allowing the comparison of actual ten-year bond yields with composite equation outputs. The benchmarked yields based on euro area bonds track consistently actual MGS yields, while from mid-2015 onwards, MGS yields follow closely a benchmark derived on the basis of underlying economic fundamentals.
    JEL: E43 E44 E63
    Date: 2017
  7. By: Jakucionyte, Egle; van Wijnbergen, Sweder
    Abstract: We explore the consequences of different financial frictions on the corporate and banking level for macroeconomic policy responsiveness to major policy measures. We show that both corporate and bank debt overhang reduce the effectiveness of fiscal policy: multipliers turn negative with debt overhang in either sector. The negative impact of banking frictions on macro outcomes increases when a larger part of working capital is financed through credit in addition to investment. Debt overhang in banks leads to positive NPV loans being rejected; but after banks increase their equity ratio and subsequently engage less in risk shifting behavior, a decline in lending emerges. Thus the macroeconomic response to higher capital requirements depends on which friction is dominant: when there is debt overhang in banks higher capital leads to more, not less loans and is expansionary; while higher capital requirements lower loan volumes and have a recessionary impact when risk shifting is the problem in banks.We trace the differential importance of corporate versus banking debt overhang back to the different approaches followed on each side of the Atlantic in response to the undercapitalization of the banks after the onset of the financial crisis. We similarly trace macrodevelopment differences in the Southern periphery of Europe and the Northern European countries to differences in the problems and policies in their financial sector.
    Keywords: Banking frictions; Capital requirements; Fiscal policy; volatility Shocks
    JEL: E44 E58 E62 G18 G21
    Date: 2018–02
  8. By: Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
    Abstract: Our paper aims to analyze the effectiveness of different risk-sharing mechanisms in providing stability to a monetary union. We select two stylized tools with extreme and opposite features. The first is an expansionary but conventional monetary policy that is used to help EMU’s most fragile member states manage their public debts; the second is a centralized fiscal policy that allows for the transfer of a portion of these public debts from EMU’s most fragile member states to those considered EMU’s “core”. By a stylized periphery-core model of a monetary union, we compare the strengths and weaknesses of these two tools in order to reach some welfare implications in terms of union stability.
    Date: 2017–11
  9. By: Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
    Abstract: There is a longstanding debate in the economics literature on whether fiscally decentralized countries are inherently more fiscally unstable. The Great Recession provides a fertile testing ground for analyzing how the degree of decentralization does actually affect countries’ ability to implement fiscal stabilization policies in response to macroeconomic shocks. We provide an empirical analysis aiming at disentangling the roles played by decentralization design itself and several recently introduced budgetary institutions such as subnational borrowing rules and fiscal responsibility laws on country’s fiscal stability. We use OECD countries’ data since 1995, which includes both a boom period of worldwide economic growth and the Great Recession. Our main finding is that well-designed decentralized systems are not destabilizing. But, in addition, sub-national fiscal and borrowing rules should be at work to improve the overall fiscal stability performance of decentralized countries.
    Keywords: sub-national governments, political decentralization, fiscal stability, public deficit.
    JEL: H70 H72 H77
    Date: 2018–02
  10. By: Noel Rapa (Central Bank of Malta)
    Abstract: This paper documents the fiscal extension to MEDSEA, the Central Bank of Malta DSGE model. The model contains a relatively rich fiscal sector. Decisions made by the agents in the model are affected by distortionary taxes on labour income, capital income and consumption. On the expenditure side, the model distinguishes between public sector expenditure on final goods and services, public investment, public employment as well as transfers to households. The model is used to assess the size of fiscal multipliers in a very open and small open economy such as Malta. Both transitory and permanent shocks are considered. It also allows for changes in the instrument used to finance the change in fiscal policy.
    JEL: E62 H63
    Date: 2017
  11. By: Gareth Anderson; Mehdi Raissi
    Abstract: Productivity growth in Italy has been persistently anemic and has lagged that of the euro area over the period 1999-2015, while the indebtedness of its corporate sector has increased. Using the ORBIS firm-level database, this paper studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms and investigates whether total factor productivity growth varies with the level of corporate indebtedness. We employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, and Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (for example, oil price shocks, labor and product market frictions, and stance of global financial cycle). Filtering out the effects of unobserved common factors and controlling for firmspecific characteristics, we find significant negative effects of persistent corporate debt build-up on total factor productivity growth, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. Our results have strong policy implications, for example the design of the tax system should discourage persistent corporate debt accumulation, and effective and timely frameworks to reduce corporate debt overhangs are essential.
    Date: 2018–02–23
  12. By: Roberto Bande (Universidade de Santiago de Compostela); Marika Karanassou (Queen Mary University of London)
    Abstract: Spain provides an extreme case of unemployment rate oscillations (8.3% in 2007, 26.1% in 2013, 19.6% in 2016) in parallel with cute regional persistance in labour market outcomes - the sets of relatively high and low unemployment regions have not changed in decades. Since generic labour market reforms have been fruitless in this respect, we explore whether such groups of regions react differently to key drivers of employment and wage setting. We find that the low income (high unemployment) regions are more reactive to capital accumulation, and thus to a growth strategy based on estimulating investment. In turn, the high income (low employment) ones are more sensitive to the wage-productivity gap, and thus to the strategy that keeps unit labour costs (ULC) low. Such patterns call for more region-specific policies and discard standard labour market reforms as a unique toolto manage the unemployment rate problem. Further, to the extent that investment serves both at fostering capital accumulation and labour productivity (which, in turn, reduces the ULC), regionally-targeted soft credit lines and capital taxes could be helpful in breaking regional sluggishness.
    Keywords: Employment, Wage setting, Labour income share, Capital stock
    JEL: R11 E24 E22 J23 J31
    Date: 2017–09–15
  13. By: R.J. Galema; S. Lugo
    Abstract: In March 2016 the European Central Bank (ECB) announced the Corporate Sector Purchase Program (CSPP) as part of its expanded asset purchase program. Using hand-collected, weekly lists of bonds purchased and held under the CSPP, we investigate the drivers of the purchase decisions and the impact of the program on the financing decisions of targeted firms. We find that, consistent with the goal of decreasing credit premia while minimizing price distortions, purchases of eligible bonds characterized by both higher credit risk and higher liquidity are more likely and more timely. Bonds issued by firms more likely to face difficulties in tapping the credit market directly are also more likely to be purchased. The CSPP appears effective in alleviating these difficulties. Firms targeted by the program increase their amount of bonds outstanding significantly more than non-targeted eligible issuers; the effect is mostly driven by companies making limited use of market debt before the start of the program. However, no difference is found in the variation of total debt between targeted and non-targeted eligible issuers. Together, these results suggest that the CSPP has favored the substitution of bonds for other forms of debt capital.
    Date: 2017
  14. By: Andreas P. Kyriacou; Oriol Roca Sagalés
    Abstract: In this article, we consider the impact of fiscal decentralization on government quality by way of disaggregated measures of the former. Specifically, we break down fiscal decentralization into sub-central expenditure on public procurement and compensation of public sector employees. We find that decentralizing public procurement is bad for government performance while the decentralization of public sector wages improves governance. We relate the negative effect to the rent-seeking activity of interest groups and the positive effect to the informational advantage of sub-central provision. Moreover, we explore the impact of the Great Recession on our results and find that it is associated with stronger negative and positive effects of decentralization on governance, something which is consistent with the observed increased in the degree of decentralization since 2007.
    Keywords: Fiscal decentralization, public procurement, public service provision, good governance.
    JEL: D72 D73 H11 H72
    Date: 2018–02
  15. By: Malgouyres, Clément; Mayer, Thierry
    Abstract: We investigate the role that labor costs hold in exporters' performance. To do so, we exploit a large-scale French reform that granted most firms a tax credit proportional to the wagebill of their employees paid below a given threshold. This policy effectively translated into a cut in labor cost whose magnitude varies depending on firm-specific wage structures. We use the predicted treatment intensity based on pre-reform composition of the labor force as an instrument for the actual policy-induced firm-level change in labor costs. Although our point estimates are consistent with commonly estimated firm-level trade elasticities combined with reasonable labor shares in total costs, coefficients are found to be very noisy, suggesting lack of robust evidence of a causal effect of the policy. We discuss several potential explanations for our results as well as their implications.
    Keywords: competitiveness; firm-level exports; labor costs
    JEL: D04 F14 F16 H32
    Date: 2018–02
  16. By: Jasper de Jong
    Abstract: We estimate the effect of consolidation efforts on investors' perception of government's solvency. To this end, we analyze announcements by Dutch government officials between September 2008 and December 2014 and select those messages that contain relevant new information on the likelihood and substance of consolidation packages. We then scrutinize whether announcements affect the yield spread of Dutch ten year government bonds vis-à-vis German bonds. Our findings indicate that announcements hinting at improvements in the budget balance significantly lowered yield spreads. As most announcements involve events during the negotiation process on consolidation packages rather than the official date of agreement or implementation of these packages, our results illustrate the importance of accurately assessing the news content of messages.
    Keywords: Fiscal policy announcements; Consolidation measures; Interest spreads; Political processes; Global financial crisis
    JEL: E43 E62 G01 G12 H61 H62
    Date: 2018–02

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