nep-eec New Economics Papers
on European Economics
Issue of 2018‒03‒26
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Time-varying wage Phillips curves in the euro area with a new measure for labor market slack By Dennis Bonam; Jakob de Haan; Duncan van Limbergen
  2. Effects of asset purchases and financial stability measures on term premia in the euro area By Richhild Moessner
  3. Equilibrium real interest rates, secular stagnation, and the financial cycle: Empirical evidence for euro-area member countries By Belke, Ansgar; Klose, Jens
  4. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  5. Monetary Policy and Collateral Constraints since the European Debt Crisis By J. Barthélemy; V. Bignon; B. Nguyen
  6. Migration as an Adjustment Mechanism in the Crisis? A Comparison of Europe and the United States 2006–2016 By Jauer, Julia; Liebig, Thomas; Martin, John P.; Puhani, Patrick A.
  7. The labour share and financialisation: Evidence from publicly listed firms By Guschanski, Alexander; Onaran, Özlem
  8. Income distribution and economic growth; empirical results for Slovakia By Juraj Zeman
  9. Explaining and Forecasting Euro Area Inflation: the Role of Domestic and Global Factors By S. Béreau; V. Faubert; K. Schmidt
  10. How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold By Christoph Basten; Mike Mariathasan
  11. Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves By Nymand-Andersen, Per
  12. The Search for a Euro Area Safe Asset By Jeromin Zettelmeyer; Álvaro Leandro
  13. Early Warning System of Government Debt Crises By Christian Dreger; Konstantin A. Kholodilin
  14. The Impact of Life-Course Developments on Pensions in the NDC Systems in Poland, Italy and Sweden and Point System in Germany By Chłoń-Domińczak, Agnieszka; Góra, Marek; Kotowska, Irena E.; Magda, Iga; Ruzik-Sierdzińska, Anna; Strzelecki, Pawel
  15. Money demand stability, monetary overhang and inflation forecast in the CEE countries By Claudiu Tiberiu Albulescu; Dominique Pépin
  16. A risk dashboard for the Italian economy By Fabrizio Venditti; Francesco Columba; Alberto Maria Sorrentino
  17. Cyclical Behavior of Fiscal Policy in the Western Balkans By Sabaj, Ernil
  18. Over-the-counter interest rate derivatives: The clock is ticking for the UK and the EU By Thomadakis, Apostolos
  19. A Note on the Stability of the Swedish Philips Curve By Karlsson, Sune; Österholm, Pär

  1. By: Dennis Bonam; Jakob de Haan; Duncan van Limbergen
    Abstract: Recently, the unemployment gap in the euro area has fallen markedly. However, wages increased less than predicted by traditional Phillips curves. Using Bayesian methods, we estimate the wage Phillips curve with time-varying parameters. We consider alternative measures for labor market slack, namely the unemployment gap and the European Commission's labor shortage indicator. Using the latter indicator, we find a steepening of the wage Phillips curve in Italy and France, and a stable Phillips curve in the Netherlands after the crisis. In Germany (Spain), both measures suggest a recent flattening (steepening) of the wage Phillips curve.
    Keywords: Wage Phillips curve; Labor shortage indicator; Time-varying parameters
    JEL: E24 E31 E58
    Date: 2018–03
  2. By: Richhild Moessner
    Abstract: We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area in the wake of the global financial crisis and the euro area sovereign debt crisis on ten-year government bond term premia in eleven euro area countries. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.
    Keywords: Monetary policy, asset purchases, financial stability, term premia
    JEL: E58 G15
    Date: 2018–03
  3. By: Belke, Ansgar; Klose, Jens
    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 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,Euro area,financial cycle,heterogeneity,monetary policy,secular stagnation
    JEL: E43 C32
    Date: 2018
  4. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper estimates an open-economy dynamic stochastic general equilibrium model with Bayesian techniques to analyse the macroeconomic effects of the European Central Bank’s (ECB’s) quantitative easing (QE) programme. Using data on government debt stocks and yields across maturities, we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to annual euro area output growth and inflation in 2015-16 of up to 0.3 and 0.6 percentage points (pp) in the linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact to up to 0.7 and 0.8 pp.
    Keywords: Economic models, Interest rates, Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2018
  5. By: J. Barthélemy; V. Bignon; B. Nguyen
    Abstract: With the European debt crisis, the role of assets accepted by the Eurosystem as collateral for refinancing operations took on a new place in the public debate, as, against a backdrop of shifting demand for refinancing, movements in European bond prices led to significant fluctuations in the collateral constraints of credit institutions. This paper documents the change in and heterogeneity of these constraints. We assess the impact attributable to the downgrade of sovereign ratings and the decline in asset prices during the European debt crisis on the valuation of collateral available for refinancing. We also construct indicators that track the change in the quality and liquidity of posted collateral. Our findings suggest that the flexibility of the Eurosystem collateral framework enabled credit institutions to cushion the shock created by the European debt crisis by depositing assets that were less liquid than bonds without causing a relative deterioration in the average rating of assets posted as collateral compared with the average rating on the market, as measured by eligible marketable assets.
    Keywords: Collateral; Eurosystem; Transmission of monetary policy; European debt crisis.
    JEL: E52 E58 G10
    Date: 2018
  6. By: Jauer, Julia (Federal Ministry of Labor and Social Affairs (BMAS), Germany); Liebig, Thomas (OECD); Martin, John P. (University College Dublin); Puhani, Patrick A. (Leibniz University of Hannover)
    Abstract: We estimate whether migration can be an equilibrating force in the labour market by comparing pre- and post-crisis migration movements at the regional level in both Europe and the United States, and their association with asymmetric labour market shocks. Based on fixed-effects regressions using regional panel data, we find that Europe's migratory response to unemployment shocks was almost identical to that recorded in the United States after the crisis. Our estimates suggest that, if all measured population changes in Europe were due to migration for employment purposes – i.e. an upper-bound estimate – up to about a quarter of the asymmetric labour market shock would be absorbed by migration within a year. However, in Europe and especially in the Eurozone, the reaction to a very large extent stems from migration of recent EU accession country citizens as well as of third-country nationals.
    Keywords: free mobility, migration, economic crisis, labour market adjustment, Eurozone, Europe, United States
    JEL: F15 F22 J61
    Date: 2018–02
  7. By: Guschanski, Alexander; Onaran, Özlem
    Abstract: This paper provides international evidence for the effect of financialisation on the labour share at the firm level. We test different hypotheses about the impact of financialisation on functional income distribution, while also controlling for the effect of technological change, market concentration, labour market institutions and globalisation. We use panel data for publicly listed non-financial companies globally and with a particular focus on the EU15 for the period of 1995-2016. We find a negative effect of financialisation on the labour share due to increased shareholder value orientation in all countries, while there is also evidence of a negative effect due to an increase in mark-ups in France and the UK. Additionally, our findings cast doubt on the hypotheses that the decline in the labour share in European publicly listed firms is due to technological change. Similarly, market concentration did not play an important role for the decline in the labour share. In contrast, we find that concentration has declined among publicly listed firms in Europe, and that concentration is not associated with declining labour shares.
    Keywords: labour share; income distribution; financialisation; market concentration; technology
    JEL: J3
    Date: 2018–03–05
  8. By: Juraj Zeman (National Bank of Slovakia)
    Abstract: The relationship between income inequality and economic growth is an ambiguous one but most mainstream economists view real wage increases as a drag on economic growth as they lead to higher labor costs, lower competitiveness and reduction of employment. In this study we provide an alternative view and show that a labor income increase may also have a positive effect on growth. Which of these two effects dominates in a particular country depends on the institutional and legal environment of that country, its macroeconomic conditions and also its economic policies. We apply a general Keynesian growth model that combines demand and productivity regimes to test empirically two distinct economies – the small, very open economy of Slovakia and the large, relatively closed economy of the euro area. We find that an income rise increases domestic demand and reduces external trade in both economies. But the total effect of income inequality on economic activity is opposite in both economies in the short run. In the Slovak case the positive effect of lower income inequality on domestic demand is surpassed by its negative effect on net exports. Hence higher income inequality is associated with higher economic growth; the Slovak economy is profit-led. In the case of the euro area the positive effect of income rises on domestic demand is larger than the negative effect on net exports. Hence higher income inequality is associated with lower economic growth; the euro area is wage-led. In the long run, however, both economies are wage-led. The regime switch in the Slovak economy is caused by the inclusion of the positive impact of a wage increase on productivity. We also partially analyze the economies of the Slovak trading partners and doing so we get results for new EU member economies that are compared and contrasted with the old EU members.
    Keywords: Inequality, wage led growth, profit led growth, Slovakia
    JEL: E12 E25 E60
  9. By: S. Béreau; V. Faubert; K. Schmidt
    Abstract: In this paper, we study the fit and the predictive performance of the Phillips curve for euro area inflation with regard to different inflation series, time periods and predictor variables, notably different global factors. We compare the relative performance of a large set of alternative global factors in the Phillips curve, such as commodity prices, import prices, global consumer inflation, global economic slack and foreign demand. We find that traditional global indicators such as oil prices and import prices provide more accurate information for euro area headline inflation than global slack measures. In what regards the forecast ability of the Phillips curve for headline inflation, we show that it is unstable and depends strongly on the time period. Global factors provide only limited additional information for forecasting. In addition, we explore whether domestic demand and global factors are useful for analysing the entire conditional distribution of euro area inflation. We find that their impact varies across inflation quantiles (low vs. high inflation) and that inflation is more persistent at the low end of the distribution. We provide evidence that quantile information can lead to more accurate forecasts in periods of persistently low inflation.
    Keywords: Inflation; Forecasting; Phillips curve; Quantile regression.
    JEL: E31 E37 C22 C53
    Date: 2018
  10. By: Christoph Basten; Mike Mariathasan
    Abstract: We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.
    Keywords: monetary policy transmission, negative interest rates, bank profitability, risk-taking, bank lending, Basel III
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2018
  11. By: Nymand-Andersen, Per
    Abstract: The European Central Bank (ECB), as part of its forward-looking strategy, needs high-quality financial market statistical indicators as a means to facilitate evidence-based and sound decision-making. Such indicators include timely market intelligence and information to gauge investors’ expectations and reaction functions with regard to policy decisions. The main use of yield curve estimations from an ECB monetary policy perspective is to obtain a proper empirical representation of the term structure of interest rates for the euro area which can be interpreted in terms of market expectations of monetary policy, economic activity and inflation expectations over short-, medium- and long-term horizons. Yield curves therefore play a pivotal role in the monitoring of the term structure of interest rates in the euro area. In this context, the purpose of this paper is twofold: firstly, to pave the way for a conceptual framework with recommendations for selecting a high-quality government bond sample for yield curve estimations, where changes mainly reflect changes in the yields-to-maturity rather than in other attributes of the underlying debt securities and models; and secondly, to supplement the comprehensive – mainly theoretical – literature with the more empirical side of term structure estimations by applying statistical tests to select and produce representative yield curves for policymakers and market-makers. JEL Classification: G1, E4, E5
    Keywords: data quality, term structure, yield curve models
    Date: 2018–02
  12. By: Jeromin Zettelmeyer (Peterson Institute for International Economics); Álvaro Leandro (Peterson Institute for International Economics)
    Abstract: This paper evaluates four approaches to creating "safe assets" or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt ("national tranching"); (2) a senior security backed by a diversified pool of national sovereign debt ("ESBies"); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt ("E-bonds"); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers.
    Keywords: sovereign debt, banking crisis, euro crisis, safe assets, ESBies
    JEL: E43 E58 F34 G12
    Date: 2018–03
  13. By: Christian Dreger; Konstantin A. Kholodilin
    Abstract: The European debt crisis has revealed serious deficiencies and risks on a proper functioning of the monetary union. Against this backdrop, early warning systems are of crucial importance. In this study that focuses on euro area member states, the robustness of early warning systems to predict crises of government debt is evaluated. Robustness is captured via several dimensions, such as the chronology of past crises, econometric methods, and the selection of indicators in forecast combinations. The chosen approach is shown to be crucial for the results. Therefore, the construction of early warning systems should be based on a wide set of variables and methods in order to be able to draw reliable conclusions.
    Keywords: Sovereign debt crises, multiple bubbles, signal approach, logit, panel data model
    JEL: C23 C25 H63
    Date: 2018
  14. By: Chłoń-Domińczak, Agnieszka (Warsaw School of Economics); Góra, Marek (Warsaw School of Economics); Kotowska, Irena E. (Warsaw School of Economics); Magda, Iga (Warsaw School of Economics); Ruzik-Sierdzińska, Anna (Warsaw School of Economics); Strzelecki, Pawel (Warsaw School of Economics)
    Abstract: Old-age pensions in the NDC systems reflect the accumulated lifetime labour income. Interrupted careers and differences in the employment rates, particularly between men and women will have a significant impact on pension incomes in NDC countries. In the paper, we compare the labour market developments in four countries: Germany, Italy, Poland, and Sweden. There are pronounced differences in the labour market participation in the four countries: high levels of employment in Germany and Sweden are in contrast with low levels of employment in Italy and Poland. In the latter two countries, there is also a large gender gap in the labour market participation and employment pathways. Lower employment rates and gender pay gaps, as well as country-specific employment paths are important causes of differences in expected pension levels, but there are also differences due to the design of pension system and demographic developments. Prolonging working lives and reducing gender gaps in employment and pay, particularly for those at risk of interrupted careers, is key to ensure decent old-age pensions in the future. We argue that the pension systems' design modifications that weaken the link between contribution and benefits would not solve the challenge of providing adequate old-age pensions to people with interrupted careers. On the contrary, it would make the pension systems less sustainable, while the problem would be more challenging in the future.
    Keywords: NDC, old-age pensions, lifetime labour income, gender pay gap, interrupted carriers, sequence analysis, employment path
    JEL: H55 J16 J26 J31
    Date: 2018–02
  15. By: Claudiu Tiberiu Albulescu; Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.
    Keywords: CEE countries ,currency substitution,money demand stability,monetary overhang,inflation forecasts
    Date: 2018–03–01
  16. By: Fabrizio Venditti (Bank of Italy); Francesco Columba (Bank of Italy); Alberto Maria Sorrentino (Bank of Italy)
    Abstract: In this paper we describe an analytical framework to assess financial stability risks in the Italian economy. We use a large number of indicators, selected to take into account the peculiarities of the Italian economy, to monitor risks in seven areas: interlinkages, the credit markets, the macroeconomic environment, funding conditions, the financial markets, and the banking and insurance sectors. Based on thresholds selected on the basis of either expert judgment or historical distributions, we construct risk heatmaps and derive aggregate scores for each of the above risk categories. By providing timely information on the buildup of risks, the proposed dashboard usefully complements other analytical tools currently used for developing and implementing macroprudential policy.
    Keywords: early warning indicators, financial stability risks, heatmaps, macroprudential policy
    JEL: G12 G21 G23 G28
    Date: 2018–02
  17. By: Sabaj, Ernil
    Abstract: This paper studies the cyclical behavior of fiscal policy in the Western Balkans region, investigating empirically the fiscal policy response to business cycles for the period 2003-2016. Although there is a large empirical literature which has found that fiscal policy in developing countries is pro-cyclical, not many studies are found on the Western Balkans region, with only a few done at country level. We apply the Hodrick-Prescott (HP) filter and other filters to measure the potential output and output gap for each of the respective Western Balkans countries. By performing country regressions we find that one of the main determinants fiscal pro-cyclicality in the WB6 region is the quality of the government. We conduct a series of structural vector auto-regressions (SVAR) for each of the countries in an attempt to obtain further evidence on the reaction of fiscal policy to the business cycle.
    Keywords: Fiscal Policy, Business Cycles, Pro-cyclicality, Counter-cyclicality, Western Balkans
    JEL: E30 E32 E60 E62 H60
    Date: 2018–02–07
  18. By: Thomadakis, Apostolos
    Abstract: Over-the-counter (OTC) derivatives markets, in particular interest rate derivatives (IRD), have grown significantly in recent decades and now constitute a systemically important component of financial services activity. The UK plays a central role in clearing derivatives, both at a global and EU level. It is the single biggest venue for OTC derivatives activity and is even larger in terms to euro-denominated IRD contracts clearing. Yet, the fact that a large share of euros is traded, and will be traded after Brexit, in a non-euro area country raises questions about the regulation and supervision of such markets and the sustainability of liquidity provision, particularly during a time of financial turmoil. The burning question is thus whether the clearing of euro-denominated derivatives can remain in London or should be moved to the eurozone. With the aim of shedding light on this issue, this report explores the OTC IRD market and the UK’s role in it, and examines the potential costs of a relocation policy of CCPs after Brexit. It argues that there are aspects of the Commission’s proposal that require further attention and clarification. The easiest approach might be to establish a location policy to require systemically important CCPs to be located within the eurozone, but this would be an error of judgement. The report highlights the urgent need for an impact assessment of the fragmentation, risks and costs of such a move. It concludes that the best hope of addressing the risks of clearing post-Brexit is for heightened supervision, deep cooperation and clear coordination between the EU and the UK, rather than a potentially forced relocation of services currently provided by UK firms to the EU.
    Date: 2018–02
  19. By: Karlsson, Sune (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: We use Bayesian techniques to estimate bivariate VAR models for Swedish unemployment rate and inflation. Employing quarterly data from 1995Q1 to 2017Q3 and new tools for model selection, we compare a model with time-varying parameters and stochastic volatility to a specification with constant parameters and covar-iance matrix. We find strong evidence in favour of the specification with time-varying parameters and sto-chastic volatility. Our results indicate that the Swedish Phillips curve has not been stable over time. However, our findings do not suggest that the Phillips curve has been flatter in more recent years.
    Keywords: Inflation; Unemployment; Time-varying parameters; Stochastic volatility
    JEL: C11 C32 E32
    Date: 2018–03–14

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