nep-eec New Economics Papers
on European Economics
Issue of 2018‒04‒09
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Brexit and CDS spillovers across UK and Europe By Jamal Bouoiyour; Refk Selmi
  2. Counterproductive Proposals on Euro Area Reform by French and German Economists By Messori, Marcello; Micossi, Stefano
  3. Public Expenditure Multipliers in recessions. Evidence from the Eurozone. By Andrea Boitani; Salvatore Perdichizzi
  4. How Effective are Sovereign Bond-Backed Securities as a Spillover Prevention Device By Cronin, David; Dunne, Peter G.
  5. Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: A structural model-based approach By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
  6. The Brexit as a Forerunner: Monetary Policy, Economic Order and Divergence Forces in the European Union By Sebastian Müller; Gunther Schnabl
  7. Real exchange rate misalignments in the euro area By Michael Fidora; Claire Giordano; Martin Schmitz
  8. Macroprudential regulation in the European Union in 1995-2014: introducing a new data set on policy actions of a macroprudential nature By Budnik, Katarzyna; Kleibl, Johannes
  9. Portfolio rebalancing and the transmission of large-scale asset programmes: evidence from the euro area By Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
  10. Credit shocks and the European labour market By Bodnár, Katalin; Fadejeva, Ludmila; Hoeberichts, Marco; Peinado, Mario Izquierdo; Jadeau, Christophe; Viviano, Eliana
  11. Why an EU Referendum? Why in 2016? By Becker, Sascha O; Thiemo Fetzer
  12. A Central Fiscal Stabilization Capacity for the Euro Area By Nathaniel G Arnold; Bergljot B Barkbu; H. Elif Ture; Hou Wang; Jiaxiong Yao
  13. The Capital Markets Union: Key Challenges By Allen, Franklin; Pástor, Luboš
  14. Sustainable development, environmental policy and renewable energy use: A dynamic panel data approach By Fotis, Panagiotis; Polemis, Michael
  15. Flight to Safety from European Stock Markets By Aslanidis, Nektarios,; Christiansen, Charlotte
  16. The impact of fiscal rules on sustainable development of the Visegrad Group countries By Jens Hoelscher; Marta Postula; Agnieszka Alińska; Jarosław Klepacki
  17. A minimal moral hazard central stabilisation capacity for the EMU based on world trade By Beetsma, Roel; Cima, Simone; Cimadomo, Jacopo
  18. Aggregate Multi-Factor Productivity: Measurement Issues in OECD Countries By Balazs Egert

  1. By: Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Refk Selmi (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: Understanding the transmission process between markets is critical for risk management and economic policy. The objective of this paper is twofold. First, it identifies when UK and European (France, Germany, Italy and Spain) Credit Default Swaps (CDSs) exhibit explosivity with respect to their past behaviors. Second, it quantifies the dynamics of CDS volatility spillover effects surrounding the UK's EU membership referendum commonly known as " Brexit ". Using a recursive identification algorithm and new spillover measures suggested by Diebold and Yilmaz (2012), quite interesting results were drawn. We detect significant build-ups in CDS prices for all countries under study soon after the day relative to the announcement of Brexit. Besides, we show that the great uncertainty over Brexit generates significant volatility spillovers across the underlined CDS. In particular, we find that UK, Italy and Spain are the " net volatility transmitters " , while France and Germany seem the " net volatility receivers ". Such information can help policy makers in undertaking decoupling policies to (1) insulate the economy from risk spillovers effects, (2) lighten the spread of the damage done by Brexit and (3) preserve the stability of financial system. To attenuate the risk transmission across CDS markets over Brexit, regulators can, for example, put forth preventive strategies by foregrounding the most influential volatility senders (UK, Italy and Spain).
    Keywords: Brexit,Credit Default Swaps,Explosivity,Volatility spillover effects,UK,Europe
    Date: 2018–03–17
  2. By: Messori, Marcello; Micossi, Stefano
    Abstract: In this contribution, Marcello Messori and Stefano Micossi find that the latest proposals by a group of French and German economists for euro area reform, despite the authors’ best intentions, would heighten the risks of financial instability and weaken defences against financial shocks. In their CEPR Policy Insight No. 91, Bénassy-Quéré et al. (2018) offer a comprehensive and sophisticated attempt to bridge the gap separating French and German policy-makers on European Economic and Monetary Union by completing Banking Union and establishing a credible system to enforce budgetary discipline and bring down sovereign debt-to-GDP ratios. Our comparison between Bénassy-Quéré et al. and Schäuble’s October 2017 non-paper – which we have taken as the unmitigated expression of the German ordoliberal view – indicates a quasi-complete coincidence of policy recommendations. Prior sovereign debt restructuring is at the centre of the proposed new governance arrangements, a sure harbinger of renewed instability. The understandable concern to establish a harder budget constraint on national fiscal policies has in our view been pushed too far. Even more worrisome, in their quest to uproot moral hazard, Bénassy-Quéré et al. propose to eliminate from the euro-area governance arrangements all room for meeting shocks with liquidity instruments. They want banks to be “structurally” excluded from purchasing own national sovereigns in situations of distress. And they want to all but remove the financial stability exceptions for the activation of bail-in in the Bank Recovery and Resolution Directive (BRRD) and the related provisions for state aid to the banks. They would thus create an environment in which any idiosyncratic shock hitting a highly-indebted country would push it into the arms of the European Stability Mechanism (ESM), where its sovereign debt would be mercilessly restructured before any financial assistance could be considered. Investors would no doubt take notice and flee well in advance. Their proposed new lending window at the ESM does not address this issue since the new facility is limited to member states that are not at risk of losing market access. Thus, far from succeeding in their stated goal of making the euro area more stable, these proposals heighten the risks of financial instability and weaken euro area defences against financial shocks. Therefore, in our view they do not offer a basis for a viable compromise on the future governance of the euro area between France, Germany and the other member states of the euro area.
    Date: 2018–02
  3. By: Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Salvatore Perdichizzi
    Abstract: During the sovereign debt crisis, many Euro countries have deployed \austerity packages" implementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recovery and a reduction of the debt to gdp ratio. Key to this outcome is the size and sign of expenditure multipliers when the economy is in a recession. We estimate, for the Eurozone countries, expenditure multipliers in recession and expansion using the linear projection approach and forecast errors to identify exogenous expenditure shocks. The empirical evidence suggests that, in a recession, an increase in government spending will be e ective in boosting aggregate demand, crowding-in private consumption in the shortto- medium run, without raising the debt to gdp ratio but rather decreasing it. The opposite applies in expansions. Estimates also show that expenditure multipliers, in a recession, are larger in high debt/defict countries than in low debt/deficit countries. In a recession, fiscal consolidation based on expenditure cuts would have both short and medium run contractionary effects.
    Keywords: Expenditure multipliers, State-dependent scal policy, Fiscal consolidation.
    JEL: E32 E62
    Date: 2018–03
  4. By: Cronin, David (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland)
    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¨onbucher (2003). A lower spillover 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.
    Keywords: Safe Assets, Sovereign Bond Securitisation, Bank-Sovereign Diabolic Loop
    JEL: C58 G11 G12 G17
    Date: 2018–02
  5. By: Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland); Pisani, Massimiliano (Bank of Italy)
    Abstract: We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative.
    Keywords: DSGE models, labour taxes, unemployment, monetary union, open-economy macroeconomics
    JEL: E24 E32 E52 E62
    Date: 2018–02
  6. By: Sebastian Müller; Gunther Schnabl
    Abstract: We analyze the effects of the increasingly expansionary monetary policies on the economic order and on the European integration process. We argue that the market orders shaped in postwar Germany and in Margret Thatcher’s United Kingdom have long served as cornerstones for growth, prosperity and social cohesion in Europe. It is shown that the monetary policies of the European Central Bank and the Bank of England have undermined these orders, thereby eroding productivity gains and growth. Combined with negative distribution effects, ultra-loose monetary policies constitute the breeding ground for divergence forces in the European Union as heralded by the Brexit.
    Keywords: European integration, economic order, Walter Eucken, Friedrich August von Hayek, Margret Thatcher, inequality, monetary policy, political polarization, divergence, Brexit
    JEL: B25 E58 E65
    Date: 2018
  7. By: Michael Fidora (European Central Bank); Claire Giordano (Banca d’Italia); Martin Schmitz (European Central Bank)
    Abstract: Building upon a behavioural equilibrium exchange rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals have been affected by the adoption of a single currency. A comparison of real misalignments across different country groupings (euro area, non-euro area, advanced and emerging economies), shows they are smaller in the euro area than in its main trading partners. However, in the euro area real disequilibria are also more persistent, although after the global financial crisis the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.
    Keywords: Real effective exchange rate, equilibrium exchange rate, monetary union, regulation.
    JEL: E24 E30 F00
    Date: 2018–01
  8. By: Budnik, Katarzyna; Kleibl, Johannes
    Abstract: This paper introduces a new comprehensive data set on policies of a macroprudential nature in the banking sectors of the 28 member states of the European Union (EU) between 1995 and 2014. The Macroprudential Policies Evaluation Database (MaPPED) offers a detailed overview of the “life-cycle” of policy instruments which are either genuinely macroprudential or are essentially microprudential but likely to have a significant impact on the whole banking system. It tracks events of the introduction, recalibration and termination of eleven categories and 53 subcategories of instruments. MaPPED has been based on a carefully designed questionnaire, which has been completed in cooperation with experts from national central banks and supervisory authorities of all EU member states. This paper describes the design and structure of the new data set and presents the first descriptive analysis of the use of policy measures with a macroprudential nature in the EU over the last two decades. The results indicate that there has been a remarkable variation in the use of policies of a macroprudential nature both across EU countries and over time. Moreover, the analysis provides some tentative evidence of an impact of capital buffers, lending restrictions and caps on maturity mismatches on credit to the non-financial private sector in the EU as well as of the relative ineffectiveness of sectoral risk weights in controlling credit growth. JEL Classification: E50, E60, G28
    Keywords: financial stability, macroprudential instruments, macroprudential policy, policy assessment
    Date: 2018–01
  9. By: Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
    Abstract: Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21
    Keywords: portfolio rebalancing, quantitative easing, search for yield, unconventional monetary policy
    Date: 2018–01
  10. By: Bodnár, Katalin; Fadejeva, Ludmila; Hoeberichts, Marco; Peinado, Mario Izquierdo; Jadeau, Christophe; Viviano, Eliana
    Abstract: More than five years after the start of the Sovereign debt crisis in Europe, its impact on labour market outcomes is not clear. This paper aims to fill this gap. We use qualitative firm-level data for 24 European countries, collected within the Wage Dynamics Network (WDN) of the ESCB. We first derive a set of indices measuring difficulties in accessing the credit market for the period 2010-13. Second, we provide a description of the relationship between credit difficulties and changes in labour input both along the extensive and the intensive margins as well as on wages. We find strong and significant correlation between credit difficulties and adjustments along both the extensive and the intensive margin. In the presence of credit market difficulties, firms cut wages by reducing the variable part of wages. This evidence suggests that credit shocks can affect not only the real economy, but also nominal variables. JEL Classification: D53, E24, E44, G31, G32
    Keywords: credit difficulties, intensive margin, labour input adjustment
    Date: 2018–01
  11. By: Becker, Sascha O (University of Warwick); Thiemo Fetzer (University of Warwick)
    Abstract: The outcome of the UK’s Brexit Referendum has been blamed on political factors, such as concerns about sovereignty, and economic factors such as migration, and trade integration. Analyses of the cross-sectional referendum voting pattern cannot explain how anti-EU sentiment built up over time. Since UKIP votes in the 2014 EU Parliament elections are the single most important predictor of the Vote Leave share, understanding the rise of UKIP might help to explain the role of political and economic factors in the build-up of Brexit. This paper presents new stylized facts suggesting that UKIP votes in local, national and European elections picked up dramatically in areas with weak socio-economic fundamentals, but only after 2010, at the expense of the Conservatives, and partly also Labour. The timing suggests that the Government’s austerity measures might have been a crucial trigger that helped to convert economic grievances into UKIP votes, putting increasing pressure on the Conservatives to hold the EU Referendum.
    Keywords: Political Economy ; Austerity ; Globalization ; Voting ; EU
    JEL: R23 D72 N44 Z13
    Date: 2018
  12. By: Nathaniel G Arnold; Bergljot B Barkbu; H. Elif Ture; Hou Wang; Jiaxiong Yao
    Abstract: This note outlines a concrete proposal for a euro area central fiscal capacity (CFC) that could help smooth both country-specific and common shocks. Specifically, it proposes a macroeconomic stabilization fund financed by annual contributions from countries that are used to build up assets in good times and make transfers to countries in bad times, as well as a borrowing capacity in case an exceptionally large shock exhausts the fund’s assets. To address moral hazard risks, transfers from the CFC—beyond a country’s own net contributions—would be conditional on compliance with the EU fiscal rules. The note also discusses several features aimed at avoiding permanent transfers between countries and making the CFC function as automatically as possible—to limit the scope for disputes over its operation—both of which are important points to make it politically acceptable.
    Keywords: Euro Area;Fiscal policy;Euro Area; Fiscal Integration; Macroeconomic Stabilization; Central fiscal capacity; Fiscal policy; Macroeconomic policy mix; Fiscal union;
    Date: 2018–03–26
  13. By: Allen, Franklin; Pástor, Luboš
    Abstract: In September 2015, the European Commission announced the first actions of its plan to build a Capital Markets Union in Europe. We describe the key features of the Commission's plan and discuss the economic rationale behind it. The plan has many strengths but also some weaknesses, such as limited ambition in the supervision and enforcement of securities regulations. Other challenges to the development of European capital markets include the financial transactions tax, the low-interest-rate environment, cultural reasons, and potential political opposition.
    Keywords: Capital Markets Union
    JEL: G18 G28 G38
    Date: 2018–02
  14. By: Fotis, Panagiotis; Polemis, Michael
    Abstract: The aim of this paper is to cast light on the relationship between sustainable development environmental policy and renewable energy use. We utilize a dynamic GMM approach over a panel of 34 European Union (EU) countries spanning the period 2005-2013. Our findings reveal a positive monotonic relationship between development and pollution. Energy saving positively affects environmental degradation, while energy intensity increases air pollution. Our findings imply important policy implications to policy makers toward sustainability. Despite the fact that the Europe “20-20-20” climate and energy package strategy seems to be achieved, the recently adopted Energy Roadmap 2050 must be updated on regular basis in order to be effectively implemented and monitored by government officials and firms’ stakeholders. Therefore, we argue that EU countries must increase the use of new technology and renewable energy capacity in order to align environmental policies towards more efficient energy use and sustainable development among the EU periphery.
    Keywords: Sustainable Development; Environmental Policy; Renewable Energy Sources; Dynamic Panel Data Analysis
    JEL: D23 L16 O11 Q56
    Date: 2018–02–19
  15. By: Aslanidis, Nektarios,; Christiansen, Charlotte
    Abstract: This paper investigates flight-to-safety from stocks to bonds in seven European markets. We use quantile regressions to identify flight- to-safety episodes. The simple risk-return trade-off on the stock markets is negative which is caused by flight-to-safety episodes: During normal periods, the risk-return trade-off is positive and during flight-to-safety episodes it is negative. The effects of flight-to-safety episodes on the risk-return trade-off are qualitatively similar for own country flight-to-safety episodes, for flight from own country stock market to the US bond market, and for US flight- to-safety. The strength of the trade-off is strongest for own country flight- to-safety episodes. The risk-return trade-off is not significantly influenced by recession periods or the recent sovereign debt crisis. The main results hold for flight to gold instead of to bonds. Keywords: flight-to-safety; risk-return trade-off; European markets; stock market; bond market; gold futures. JEL Classfications: C58, F30, G11, G15
    Keywords: Finances internacionals, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2018
  16. By: Jens Hoelscher (Bournemouth University, Executive Business Centre); Marta Postula (Warsaw University); Agnieszka Alińska (Warsaw School of Economics); Jarosław Klepacki (University of Social Sciences, Poland)
    Abstract: The research question presented in this analysis focuses on national fiscal rules applicable in the Visegrád Group, also called V4, Czech Republic, Hungary, Poland and Slovakia as expressed in the European standardised fiscal rules index and on their impact on the socio-economic policy, expressed by indicators relating to the condition of public finance, economic results and sustainability finance indicators. The use of fiscal rules as an instrument of fiscal sustainability is manifested by imposing the requirements as regards to borrowing and the costs of public debt service. A high level of debt can cause social development expenditure to be crowded out, contributing to growing development disparities in social and economic terms.
    Keywords: fiscal rules; sustainable development; socio-economic policy
    JEL: F4 H5 H6
    Date: 2018–03
  17. By: Beetsma, Roel; Cima, Simone; Cimadomo, Jacopo
    Abstract: Recent debate has focused on the introduction of a central stabilisation capacity as a completing element of the Economic and Monetary Union. Its main objective would be to contribute cushioning country-specific economic shocks, especially when national fiscal stabilisers are run down. There are two main potential objections to such schemes proposed so far: first, they may lead to moral hazard, i.e. weaken the incentives for sound fiscal policies and structural reforms. Second, they may generate permanent transfers among countries. Here we present a scheme that is relatively free from moral hazard, because the transfers are based on changes in world trade in the various sectors. These changes can be considered as largely exogenous, hence independent from an individual government’s policy; therefore, the scheme is better protected against manipulation. Our scheme works as follows: if a sector is hit by a bad shock at the world market level, then a country with an economic structure that is skewed towards this sector receives a (one-time) transfer from the other countries. The scheme is designed such that the transfers add up to zero each period, hence obviating the need for a borrowing capacity. We show that the transfers generated by our scheme tend to be countercyclical and larger when economies are less diversified. In addition, since transfers are based on temporary changes in world trade, the danger of permanent transfers from one set of countries to the other countries is effectively ruled out. Finally, we show that transfers are quite robust to revisions in the underlying export data. JEL Classification: E32, E62, E63
    Keywords: central fiscal capacity, EMU, exports, moral hazard
    Date: 2018–03
  18. By: Balazs Egert
    Abstract: This paper analyses for 34 OECD countries the extent to which the calculation of aggregate multi-factor productivity (MFP) is sensitive to alternative parameterisations. The starting point is the definition of MFP used in previous work in the OECD’s Economics Department (e.g. Johansson et al. 2013). They include alternative MFP measures, with human capital included or excluded, with different measures of Purchasing Power Parity (PPP) exchange rates, using time-varying capital depreciation rates and different measures of capital stock and labour input (headcount against hours worked). The main result of the paper is that whether or not human capital is included in MFP makes a significant difference for the level and dynamics of MFP. At the same time, MFP measures are less sensitive to other parameters of the calculation.
    Keywords: C230, C510, J200, L430, L510, O400
    JEL: C23 C51 J20 L43 L51 O40
    Date: 2018

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