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on European Economics |
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Issue of 2018‒04‒30
fifteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Abidi, Nordine; Miquel-Flores, Ixart |
| Abstract: | On March 10, 2016, the European Central Bank (ECB) announced the Corporate Sector Purchase Programme (CSPP) – commonly known as corporate quantitative easing (QE) – to improve the financing conditions of the Eurozone’s real economy and strengthen the pass-through of unconventional monetary interventions. Using a regression discontinuity design framework that exploits the rating wedge between the ECB and market participants, we show that: (i) bond yield spreads decline by around 15 basis points at the announcement of the programme, (ii) the impact is mostly noticeable in the sample of CSPP-eligible bonds that are perceived as high yield from the viewpoint of market participants and, (iii) the CSPP seems to have stimulated new issuance of corporate bonds. Overall, our results are consistent with the explanation that highlights the portfolio rebalancing mechanism and the liquidity channel. JEL Classification: E50, E52, G11, G30, G32 |
| Keywords: | bond issuance, corporate quantitative easing (QE), cost of financing, liquidity, regression discontinuity design, unconventional monetary policy |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182145&r=eec |
| By: | Conall O'Sullivan; Vassilios G. Papavassiliou |
| Abstract: | This chapter examines the impact the European sovereign debt market crisis had on liquidity and volatility dynamics and their interdependencies in the eurozone government bond market. In particular, we examine the impact across different countries and across different maturity buckets within individual countries. A comprehensive high-frequency dataset from MTS, Europe's premier electronic fixed-income trading market, is employed to construct a variety of microstructure liquidity and volatility measures. We analyze important trends in these measures over both tranquil and crisis periods. Additionally, we study time-varying correlations as well as the intertemporal interactions of liquidity proxies with volatility and returns. Our findings provide useful insights to regulators and policy makers on the relative strengths and weaknesses of domestic and global financial systems. |
| Keywords: | Eurozone crisis; Financial contagion; Liquidity-volatility spillovers; Bond markets |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:rru:oapubs:10197/9299&r=eec |
| By: | Atanas Pekanov (WIFO) |
| Abstract: | The New View on fiscal policy (as coined by Furman 2016) represents a rethinking of the main-stream consensus on the optimal macroeconomic policy mix. It focuses on a reassessment of the relative effectiveness of fiscal policy and its ability to stabilise the economy when monetary policy reaches its limit. This paper aims to present in detail the main principles of the New View as proposed by Furman (2016), to extend them, bring additional theoretical and empirical evidence, as well as concrete policy implications for the architecture of the European Monetary Union. The New View builds upon five core principles: Firstly, fiscal policy is a significant and efficient complement to monetary policy at the zero lower bound on theoretical grounds. Secondly, we take a closer look at the empirical evidence on government spending multipliers in a recession, both in the DSGE and in the VAR literature, and show it points to much higher multipliers than in normal times. Thirdly, we provide evidence to why fiscal space is actually higher than normally perceived in a recession, because fiscal stimuli can pay for themselves by enhancing current growth and potential output. We shortly discuss whether it is not better to have a sustained stimulus rather than a short one and whether enhanced global spillover effects in an environment of insufficient aggregate demand further enhance fiscal policy effectiveness. All of the above arguments point to the welfare enhancing effects of fiscal stimulus during a zero lower bound episode and that an approach, led by the New View, would have delivered better macroeconomic outcomes during the Eurozone crisis. We then discuss what such an approach could mean for a more resilient EMU architecture and for stabilisation mechanisms in the Euro Area. |
| Keywords: | Macroeconomic stabilisation, Fiscal policy, Zero-lower bound, Business cycle |
| Date: | 2018–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2018:i:562&r=eec |
| By: | Mayer, Thierry; Vicard, Vincent; Zignago, Soledad |
| Abstract: | In this paper we quantify the ``Cost of Non-Europe'', i.e. the trade-related welfare gains each country member has reaped from the European Union. Thirty years after the terminology of Non-Europe was used to give estimates of the gains from further integration, we use modern versions of the gravity model to estimate the trade creation implied by the EU, and apply those to counterfactual exercises where for instance the EU returns to a ``normal'', shallow-type regional agreement, or reverts to WTO rules. Those scenarios are envisioned with or without the exit of the United Kingdom from the EU (Brexit) happening, which points to interesting cross-country differences and potential cascade effects in doing and undoing of trade agreements. |
| Keywords: | European Union; Gravity; trade integration |
| JEL: | F1 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12844&r=eec |
| By: | Gärtner, Stefan; Fernández, Jorge |
| Abstract: | When looking at the Spanish banking market through a German lens, the differences between the banking markets in these countries and between decentralised and centralised systems with regard to the SME-credit decision-making process become obvious. Despite our hypotheses that Spanish savings banks were similar to German savings banks until the crisis, or at least until liberalisation and before the break-up of the regional principle, we came to the conclusion that they were never as significant as savings banks in Germany, at least not for SME finance. Notwithstanding recent initiatives to create a common European market and to integrate diverse national banking systems, the European financial system remains spatially complex and uneven, particularly with respect to the degree of geographical concentration. Whereas decentralisation increased in Germany, especially during the financial crisis, the rather decentralised Spanish banking system has become more and more centralised. This development has tended to fuel the financial crisis even further in Spain. In Spain, however, whereas most savings banks, which already operated nationally, were finally privatised due to their heavy losses in the crisis, regional savings banks in Germany further increased their market share in firm financing. |
| Keywords: | comparing banking systems,SME finance in Germany,SME finance in Spain,savings and cooperative banks,decentralised vs. centralised banking |
| JEL: | D43 E21 G01 G21 G38 R12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iatdps:1802&r=eec |
| By: | Patrick Augustin; Mikhail Chernov; Dongho Song |
| Abstract: | Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week. |
| JEL: | C1 E43 E44 G12 G15 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24506&r=eec |
| By: | Federico Diaz Kalan; Adina Popescu; Julien Reynaud |
| Abstract: | There is evidence that fiscal rules, in particular well-designed rules, are associated with lower sovereign spreads. However, the impact of noncompliance with fiscal rules on spreads has not been examined in the literature. This paper estimates the effect of the Excessive Deficit Procedure (EDP) on sovereign spreads of European Union member states. Based on a sample including the 28 European Union countries over the period 1999 to 2016, sovereign spreads of countries placed under an EDP are found to be on average higher compared to countries that are not under an EDP. The interpretation of this result is not straight-forward as different channels may be at play, in particular those related with the credibility and the design of the EU fiscal framework. The specification accounts for typical macroeconomic, fiscal, and financial determinants of sovereign spreads, the System Generalized Method of Moments estimator is used to control for endogeneity, and results are robust to a range of checks on variables and estimators. |
| Date: | 2018–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/87&r=eec |
| By: | Chiacchio, Francesco; Gradeva, Katerina; Lopez-Garcia, Paloma |
| Abstract: | Using micro-aggregated firm information for nine Central and Eastern European (CEE) countries and data from input-output tables, we examine the role of Global Value Chains (GVCs) for technology diffusion across EU countries. Our empirical results provide support for a two-stage diffusion process of technology across countries. In the first stage, the most productive firms in the host economy benefit from their direct exposure to new technology created in parent firms as a result of their GVC participation. In the second stage, technology spills over to the rest of firms in the host economy via domestic production networks. In addition, we show that the import of intermediate inputs –i.e. backward linkages- is the main channel of technology diffusion within GVCs. We use these results to explain the pronounced post-crisis drop in Total Factor Productivity (TFP) growth in CEE countries. We show that due to their deep integration in GVCs, CEE countries have been exposed to two recent developments highly correlated with their TFP performance: (i) a slowdown in TFP growth of parent firms located in non-CEE EU countries; and (ii) a global slowdown in the growth rate of GVC participation, which is evident also for CEE countries from 2011 onwards. Moreover, we find that the capacity of host firms in CEE countries to absorb and understand new knowledge has decreased since the crisis. We argue that this is related to the drop in R&D investment in the CEE region during the post-crisis period. JEL Classification: O33, O47, O57, C33 |
| Keywords: | Central and Eastern Europe, Global Value Chains, technology diffusion, TFP growth |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182143&r=eec |
| By: | Lionel Nesta (Université Côte d'Azur; GREDEG CNRS; OFCE Sciences Po. Paris; SKEMA Business School); Stefano Schiavo (University of Trento; OFCE Sciences Po. Paris) |
| Abstract: | The paper investigates the impact of import competition on rent-sharing between firms and employees. First, by applying recent advances in the estimation of price-costs margins to a large panel of French manufacturing firms for the period 1993-2007, we are able to classify each firm into labor- and product-market regimes based on the presence/absence of market power. Second, we concentrate on dirms that operate in an efficient bargaining framework to study the effect of import penetration on workers' bargaining power. We find that French imports from other OECD countries have a negative effect on bargaining power, whereas the impact of imports from low wage countries is more muted. By providing firm-level evidence on the relationship between international trade and rent sharing, the paper sheds new light on the effect of trade liberalization on the labor market. |
| Keywords: | firm heterogeneity, import competition, mark-up, wage bargaining |
| JEL: | F14 F16 J50 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2018-11&r=eec |
| By: | Nogues, Julio |
| Abstract: | For the United Kingdom and the European Union, the costs from the Brexit policy depends crucially on the ensuing structure of bilateral trade protection that they finally come to agree upon. For the rest of the world, Brexit will open new opportunities and create new challenges. The focus of this note is on the opportunities that would emerge for efficient agro industrial exporters in the UK market in the event of a hard Brexit. This scenario would mark the first time since 1973 that third countries face a level playing field vis a vis the EU as potential suppliers to the UK market. Partial equilibrium estimates indicate that a hard Brexit would reduce UK agro industrial imports from the EU by around 61% (from USD 45,915 million imported in 2015). Because of the relatively high protection provided to these products, this percentage is more than double the number that has been estimated for trade in all goods. The increase in food prices that would accompany adoption Brexit would likely push the UK government to liberalize imports unilaterally and/or to sign FTA’s with efficient agro industrial exporters. Apparently, this will occur within a framework of a radical shift in UK agricultural policy away from the Common Agricultural Policy that targets farm income, towards market based incentives. |
| Keywords: | Brexit, agro industrial trade, UK trade policues |
| JEL: | F13 F14 F15 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85643&r=eec |
| By: | Brinkhoff, Jeroen; Langfield, Sam; Weeken, Olaf |
| Abstract: | Existing stress tests do not capture feedback loops between individual institutions and the financial system. To identify feedback loops, the European Systemic Risk Board has developed macroprudential surveys that ask banks and insurers how they would behave in a macroeconomic stress scenario. In a pilot application of these surveys, we find evidence of herding behaviour in the banking sector, notably concerning credit retrenchment. Results show that the consequences can be large, potentially undoing the initial effects of banks’ remedial actions by worsening their solvency position. In contrast, insurers’ responses to the survey provide little evidence of herding in response to macroeconomic stress. These results highlight the usefulness of macroprudential surveys in identifying feedback loops. JEL Classification: E30, E44, G10, G18, G21, G22, G28 |
| Keywords: | financial instability, macroprudential, stress tests, surveys |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkops:201815&r=eec |
| By: | Chortareas, Georgios (King's College London and National and Kapodistrian University of Athens); Logothetis, Vassilis (Cardiff Business School); Papandreou, Andreas (National and Kapodistrian University of Athens) |
| Abstract: | We investigate how public opinion along with the electoral process affect the strength of environmental fiscal policies in the European Union (EU). Our analysis accounts for a set of economic, institutional, and political factors that can affect environmental taxes and expenditures. We pursue a dynamic panel data analysis covering 27 EU countries using public opinion data. We produce evidence showing that public concern for the environment, as gauged by opinion surveys, positively affects environmental protection expenditures, while elections negatively affect environmental tax revenues and environmental protection expenditures shrink in the aftermath of elections. We do not find evidence of partisan effects. The effect of public opinion and elections on environment-related fiscal decisions depends on the degree of integration with the global economy as well as several institutional factors including the level of corruption and the soundness of the rule of law. We also document that the results are impervious to a wide set of robustness tests. |
| Keywords: | Environmental Protection, Taxes and Expenditures, Public Opinion, European Union, Panel Data |
| JEL: | D72 Q58 C23 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2018/9&r=eec |
| By: | Dolls, Mathias (Ifo Institute for Economic Research); Doorley, Karina (Economic and Social Research Institute, Dublin); Paulus, Alari (ISER, University of Essex); Schneider, Hilmar (IZA); Sommer, Eric (IZA) |
| Abstract: | This paper assesses the effect of key demographic changes (population ageing and upskilling) that are expected by 2030 on the income distribution in the EU-27 and examines the potential of tax-benefit systems to counterbalance negative developments. Theory predicts that population ageing should increase income inequality, while the effect of up-skilling is more ambiguous. Tax-benefit systems may stabilize these expected changes though this is largely an empirical question given their typically complex nature. We use a decomposition technique to isolate the effect of projected demographic change on income inequality and poverty from the reaction of the labor market to this demographic change through wage adjustments. Our results show that demographic change is likely to lead to increasing inequality while related wage adjustments work mainly in the opposite direction. Changes to projected relative poverty are minimal for most countries. With a few exceptions, EU tax-benefit systems are able to absorb most of projected increase in market income inequality. |
| Keywords: | income distribution, demography, labor market, decomposition |
| JEL: | J11 J21 J22 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11440&r=eec |
| By: | Gabriel Jiménez (Banco de España); Enrique Moral-Benito (Banco de España); Raquel Vegas (Banco de España) |
| Abstract: | We show that bank lending standards are influenced by macroeconomic conditions. We use monthly data from the Banco de España Central Credit Register, which allow us to monitor all loan applications made by non-financial firms to non-current banks from 2002 to 2015. To test the pro-cyclicality of banks’ appetite for risk, we investigate how two firm characteristics (ex-ante credit risk and productivity) interacting with two macroeconomic indicators (business cycle and the monetary policy stance) affect the probability of granting a loan. In order to enhance identification we account for unobserved heterogeneity by means of firm and banktime fixed effects. Our findings indicate that banks soften their credit standards during booms or when monetary policy is loose to harden them during busts or when short-term interest rates increase. This pattern is especially relevant in the case of firms’ productivity, which might partly explain the dismal evolution of aggregate productivity in Spain during the pre-crisis period. Finally, we also find that these results are more pronounced among less capitalized, less liquid and more profitable banks. |
| Keywords: | productivity, credit risk, bank supply, lending standards |
| JEL: | G21 E51 D24 O47 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1811&r=eec |
| By: | Callan, Tim (Economic and Social Research Institute, Dublin); Doorley, Karina (Economic and Social Research Institute, Dublin); Savage, Michael (University College Dublin) |
| Abstract: | The Great Recession and the widespread adoption of fiscal austerity policies have heightened concern about inequality and how well tax-benefit systems redistribute. We examine how the distribution of income in the EU countries which were hardest hit during the recession evolved over this time. Using and extending a recently developed framework (Savage et al., 2017), the overall change in income inequality is decomposed into parts attributable to the change in market income inequality, changes in discretionary tax-benefit policy and automatic stabilisation effects. We implement this approach using the microsimulation software, EUROMOD, linked to EU-SILC survey data. Automatic stabilisation effects, particularly through benefits, are found to play an important role in reducing inequality in all the crisis countries. Their role is less important if we focus on the working age population only, due to the relative importance of old-age benefits in southern European welfare systems. Discretionary policy changes also contributed to reductions in inequality, but to a much lesser extent. |
| Keywords: | inequality, decomposition, great recession, discretionary policy, automatic stabilisation |
| JEL: | H24 D31 D63 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11439&r=eec |