nep-eec New Economics Papers
on European Economics
Issue of 2018‒05‒07
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. State contingent debt as insurance for euro-area sovereigns By Maria Demertzis; Stavros Zenios
  2. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  3. A time bomb for the Euro? Understanding Germany's current account surplus By Jan Priewe
  4. Why does the revovery show so little inflation By Christophe Blot; Jérôme Creel; Paul Hubert
  5. On the Persistence of UK Inflation: A Long-Range Dependence Approach By Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
  6. Implications of Macroeconomic Volatility in the Euro Area By Hauzenberger, Niko; Böck, Maximilian; Pfarrhofer, Michael; Stelzer, Anna; Zens, Gregor
  7. Economic Policy Uncertainty in Greece: Measuring Uncertainty for the Greek Macroeconomy By Stilianos Fountas; Panagiota Karatasi; Paraskevi Tzika
  8. Revisiting public support for the euro, 1999-2017: Accounting for the crisis and the recovery By Roth, Felix; Baake, E.; Jonung, Lars; Nowak-Lehmann D., Felicitas
  9. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework Q2 2016 - Q4 2017 By Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
  10. The Cost of Non-Europe, Revisited By Thierry Mayer; Vincent Vicard; Soledad Zignago
  11. Two years later: The EU circular economy package. An update By Neligan, Adriana
  12. Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis By Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
  13. Dissecting the Impact of Imports from Low-Wage Countries on French Consumer Prices By Juan Carluccio; Erwan Gautier; Sophie Guilloux-Nefussi
  14. Did the Presence of Immigrants Affect Vote Outcome in the UK Brexit Referendum ? By Hisahiro Naito and Mizuho Asai

  1. By: Maria Demertzis; Stavros Zenios
    Abstract: The euro-area sovereign debt crisis is receding. Europe is on a recovery path, growth is broad-based and unemployment is falling. One after the other, countries hit hardest by the crisis are exiting their adjustment programmes. However, debt remains high in most countries and future debt crises should not be ruled out. While the memories are fresh, it is a good time to think about insurance against future shocks. Such insurance schemes must involve risk sharing with the markets. They weaken the bank-sovereign doom loop from the sovereigns’ side, and not just from the banks’ side as pursued by the banking union, and make for a more resilient euro area. The promotion of the banking union and the establishment of a European Monetary Fund are institution-based solutions to crises. Banking union provides the safety regulations that will make banking institutions more resilient, while the EMF is a ‘fire brigade’ to be called on in emergencies. What has not been tapped are the markets, whose tolerant behaviour to sovereign demands encouraged the built up of debt, while their finicky response exacerbated the crisis. Taking ongoing G20 discussions on sovereign contingent debt as the point of departure, the authors argue that these instruments could provide market-based insurance to protect the euro area from future debt crises. Risk-sharing with the markets is a constructive way forward in the context of the Franco-German debate on risk-sharing among states versus system-wide risk reduction. The financial innovation of contingent debt is a practical euro-area reform that would not introduce risk-sharing between states or require institutional reforms or Treaty changes. However, coordination would be needed.
    Date: 2018–04
  2. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain).
    Keywords: European Central Bank, macroprudential policy, monetary policy transmission, risk-taking channel, vector autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2018
  3. By: Jan Priewe
    Abstract: The paper analyses the rise of the current account balance in Germany by around ten percentage points (relative to GDP) in the period 1999-2016. A big part of the rise is due to subdued domestic final demand which tends to suppress growth of imports. This demand-side effect has to do with weak wage dynamics, unequal income distribution and fiscal restraint. Despite ups and downs, the trend seems to be persistent. On the supply side, the cost and price competitiveness of the German economy is superior in European comparison. However, much more important is the superior non-price competitiveness in various dimensions. Exports grow in line with world exports which tend to grow markedly faster than imports and GDP in Germany. If this wedge between growth rates of imports and exports continues, the current account tends to rise, irrespective of short-term ups and downs. Germany follows an unsustainable trend.On the supply side, it is the strength of German manufacturing, the basis of the country's surplus. It has emerged in parallel with a process of creeping deindustrialisation in other EMU member states. The export championship, seemingly the crown jewel of the economy, has the mirror image of an Achilles heel. The surplus cannot be understood without the dysfunctions of the EMU which has no mechanisms to prevent and correct current account imbalances. Many policy makers are blinded by export success and vested interests of German export industries. They trust in "laisser-faire" and "no activism" advice, in contrast to concerns from the European Commission and the IMF. In this sense, there exists a time-bomb for the cohesion of the Euro area.
    Date: 2018
  4. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Low inflation despite economic recovery has given rise to the puzzle of “missing inflation”. Yet there would be no puzzle if the recovery is incomplete. While GDP is on the rise, some slack may still be present in some countries of the euro area. Against this backdrop, we investigate the empirical determinants of inflation and we investigate their relative contributions to actual inflation since 2000 to explain why inflation is currently low. Drawing on empirical estimations, we explain the dynamics of inflation since 2000 by different cyclical and structural factors. We also introduce an indicator of both conventional and unconventional monetary policies to assess the direct incidence of ECB's policies on actual inflation. All these factors explain the bulk of inflation variance since 2000. The most important determinants of inflation in the euro area are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained constant. Drawing on evidence of uneven recovery across euro area Member States, it shall be recommended to keep on pursuing the expansionary stance of monetary policy until the ECB achieves its inflation objective. Moreover, the evolution of inflation and its determinants do not meet the conditions that the ECB regarded as genuine progress towards its policy objective. Inflation has not yet happened and is not expected in the medium-run; moreover, without second-round effects on wages, it is not yet possible to expect that once inflation goes back to target, it will be selfsustained. The features of the ongoing developments in wage-price inflation suggest a decrease in the nominal anchor. The recent structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly. The timing of structural reforms is important. They may be helpful at fostering innovation and productivity provided they are implemented after economic growth has been sustained and evenly distributed across the Member states, and after inflation has reached its medium-run objective.
    Keywords: European Central Bank; Quantitative Easing; Low inflation; Inflation expectations; Wage dynamics; Output gap
    Date: 2018–03
  5. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
    Abstract: This paper examines the degree of persistence in UK inflation by applying long-memory methods to historical data that span the period from 1660 to 2016. Specifically, we use both parametric and non-parametric fractional integration techniques, that are more general than those based on the classical I(0) vs. I(1) dichotomy. Further, we carry out break tests to detect any shifts in the degree of persistence, and also run rolling-window and recursive regressions to investigate its evolution over time. On the whole, the evidence suggests that the degree of persistence of UK inflation has been relatively stable following the Bretton Woods period, despite the adoption of different monetary regimes. The estimation of an unobserved-components stochastic volatility model sheds further light on the issues of interest by showing that post-Bretton Woods changes in UK inflation are attributable to a fall in the volatility of permanent shocks.
    Keywords: UK inflation, persistence, fractional integration
    JEL: C14 C22 E31
    Date: 2018
  6. By: Hauzenberger, Niko; Böck, Maximilian; Pfarrhofer, Michael; Stelzer, Anna; Zens, Gregor
    Abstract: In this paper, we estimate a Bayesian vector autoregressive (VAR) model with factor stochastic volatility in the error term to assess the effects of an uncertainty shock in the Euro area (EA). This allows us to incorporate uncertainty directly into the econometric framework and treat it as a latent quantity. Only a limited number of papers estimates impacts of uncertainty and macroeconomic consequences jointly, and most literature in this sphere is based on single countries. We analyze the special case of a shock restricted to the Euro area, whose countries are highly related by definition. Among other variables, we find significant results of a decrease in real activity measured by GDP in most Euro area countries over a period of roughly a year following an uncertainty shock.
    Keywords: vector autoregressive models, factor stochastic volatility, uncertainty shocks
    Date: 2018–04
  7. By: Stilianos Fountas (Department of Economics, University of Macedonia); Panagiota Karatasi (Department of Economics, University of Macedonia); Paraskevi Tzika (Department of Economics, University of Macedonia)
    Abstract: We constructed the monthly Economic Policy Uncertainty (EPU) index for Greece for the period 1998-2018 using the Baker et al. (2016) methodology. This index is of critical importance for macroeconomic research given the presumed heightened levels of uncertainty in the Greek economy in the context of recent economic and political events. The newly-constructed time series of the uncertainty index is discussed and related to the recent economic and financial crisis in Greece and the Eurozone. Simple statistical analysis highlights the high levels of correlation in economic policy uncertainty between Greece, European countries and the USA. It is also shown that the uncertainty correlation between Greece and Europe is time varying and has become much lower since the onset of the Greek crisis.
    Keywords: Economic Policy Uncertainty index, Greek economy, European uncertainty.
    JEL: D80 E20 E66 G18
    Date: 2018–04
  8. By: Roth, Felix; Baake, E.; Jonung, Lars; Nowak-Lehmann D., Felicitas
    Abstract: This paper explores the evolution and determinants of public support for the euro since its creation in 1999 until the end of 2017, thereby covering the pre-crisis experience of the euro, the crisis years and the recent recovery. Using uniquely large macro and micro databases and applying up-to-date econometric techniques, this paper revisits the growing literature on public support for the euro. First, we find a majority of citizens support the euro in nearly all 19 euro area member states. Second, we offer fresh evidence that economic factors are the main determinants of change in the level of support for the euro: crisis reduces support while periods of recovery from unemployment bode well for public support. This result holds for both macroeconomic and microeconomic factors. Turning to a broad set of socio-economic variables, we find clear differences in support due to education and perceptions of economic status.
    Keywords: public support for the euro,euro area,euro crisis,economic recovery,unemployment,inflation,Economic and Monetary Union
    Date: 2018
  9. By: Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the second quarter of 2016 to the last quarter of 2017. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy implementation on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2018–04
  10. By: Thierry Mayer; Vincent Vicard; Soledad Zignago
    Abstract: In this paper we quantify the Cost of Non-Europe, i.e. the trade-related welfare losses that would occur under different scenarios of undoing 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 quantify the trade creation implied by the EU, and apply those to counterfactual exercises where for instance the EU returns to a shallow-type free trade regional agreement, or reverts to WTO rules. Those scenarios are envisioned with or without the Brexit happening, which points to interesting cross-country differences and potential cascade effects in doing and undoing of trade agreements.
    Keywords: Trade integration, Gravity, European Union.
    JEL: F1
    Date: 2018
  11. By: Neligan, Adriana
    Abstract: The European Commission aims to push forward the concepts of 'recycle, repair and re-use' as well as waste avoidance. Two years after adopting the Circular Economy Package, EU institutions finally agreed on new EU waste rules. Despite lower recycling targets as originally envisaged, most countries still have to push recycling to meet the goals. A single method of determining recycling rates was also decided, but an exemption rule will continue to allow for disparate recycling rates. Only ten countries including Germany are on track with their currently reported recycling rates to achieve the first goal of 55 per cent by 2025, assuming they keep up their recycling efforts of the past decade. Germany is leading the recycling hierarchy with 66 per cent, much more than on EU average. However, according to the new calculation method, Germany's recycling rate would drop to between 47 and 52 per cent. In this case, the German recycling rate would have to rise between 0.7 and 0.9 percentage points annually until 2035 to achieve 65 per cent. Looking back, Germany only managed 0.5 percentage points annually over the past decade based on the current method. Hence, Germany would have to push recycling and focus on more high-quality recycling. Fortunately, the country is a role model not only for its long recycling tradition and modern waste management, but also for its global leadership in recycling technologies.
    JEL: Q53 Q55 Q58 L50
    Date: 2018
  12. By: Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
    Abstract: We quantify the role of financial factors that have contributed to sluggish investment in Europe in the aftermath of the 2008-2009 crisis. Using a big data approach, we match the firms to their banks based on banking relationships in 8 European countries over time, obtaining over 2 million observations. We document four stylized facts. First, the decline in investment in the aftermath of the crisis can be linked to higher leverage, increased debt service, and having a relationship with a weak bank-once we condition on aggregate demand shocks. Second, the relation between leverage and investment depends on the maturity structure of debt: firms with a higher share of long-term debt have higher investment rates relative to firms with a lower share of long-term debt since the rollover risk for the former is lower and the latter is higher. Third, the negative effect of leverage is more pronounced when firms are linked to weak banks, i.e., banks with high exposure to sovereign risk. Firms with higher shares of short-term debt decrease investment more relative to firms with lower shares of short-term debt even both set of firms linked to weak banks. This result suggests that loan evergreening by weak banks played a limited role in increasing investment. Fourth, the direct negative effect of weak banks on the average firm's invest- ment disappears once demand shocks are controlled for, although the differential effects with respect to leverage and the maturity of debt remain.
    Keywords: Bank-Sovereign Nexus; Debt Maturity; Firm Investment; Rollover Risk
    JEL: E22 E32 E44 F34 F36 G32
    Date: 2018–04
  13. By: Juan Carluccio; Erwan Gautier; Sophie Guilloux-Nefussi
    Abstract: We provide a quantitative assessment of the impact of imports from low-wage countries (LWCs) on CPI inflation in France during 1994-2014, using detailed micro data on imports and exports. The share of imports from low-wage countries in consumption increased from about 2% to 7%, and resulted in a negative impact on CPI inflation of about 0.17 pp per year on average. This effect decomposes in three channels. 1) The substitution channel, capturing the replacement of domestic production by goods from LWCs, accounts for almost -0.05 pp. 2) The rise in the proportion of LWC goods in total imports weighed down on imported inflation. This channel reduced French CPI inflation by 0.06 pp per year. 3) Instrumental variable estimation of the competition channel at the product level shows that the increase in the market share of LWCs in French expenditures led to a negative effect of 0.06 pp on CPI inflation.
    Keywords: inflation, low-wage countries, imports, globalization, price index, consumers.
    JEL: E31
    Date: 2018
  14. By: Hisahiro Naito and Mizuho Asai
    Abstract: This paper examines the effect of the presence of immigrants on the voters' behavior using the data set of the UK popular referendum on exit from the European Union and the survey data on individual tolerance toward immigrants. We apply two stage least square(2SLS) estimation to control the endogeneity of the ratio of immigrants by using the information on past industrial composition to construct the instrumental variable while including the current industry composition and the current demographic characteristics as a control variable. Contrary to popular media content, we do not find a statistically significant evidence that the ratio of immigrants in each electoral area does affect the vote count on Brexit after controlling endogeneity of the ratio of immigrants in each electoral area and other observable characteristics. We also show that the survey result on the tolerance to immigrants is consistent with the estimation result of voters' behavior.
    Date: 2018–02

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