nep-eec New Economics Papers
on European Economics
Issue of 2018‒05‒21
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Global Crises and Populism: the Role of Eurozone Institutions By Luigi Guiso; Helios Herrera; Massimo Morelli; Tommaso Sonno
  2. The Persistence-Resilience Trade-off in Unemployment: The Role of Labor and Product Market Institutions By T. Aksoy; P. Manasse
  3. Below the Aggregate: A Sectoral Account of the UK Productivity Puzzle By Rebecca Riley; Ana Rincon-Aznar; Lea Samek
  4. The speed of exchange rate pass-through By Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
  5. Bank Profits and Margins in a World of Negative Rates By Philip Molyneux; Alessio Reghezza; Ru Xie
  6. Deciphering Professional Forecasters’ Stories - Analyzing a Corpus of Textual Predictions for the German Economy By Ulrich Fritsche; Johannes Puckelwald
  7. How Important are the International Financial Market Imperfections for the Foreign Exchange Rate Dynamics: A Study of the Sterling Exchange Rate By Xue, Dong; Minford, Patrick; Meenagh, David
  8. Understanding the long run dynamics of French unemployment and wages By Michel-Pierre Chélini; Georges Prat
  9. Trends in Employment and Social Security Incentives in the Spanish Pension System: 1980-2016 By Pilar Garcia-Gomez; Silvia Garcia-Mandico; Sergi Jiménez-Martín; Judit Vall-Castello

  1. By: Luigi Guiso (EIEF and CEPR); Helios Herrera (Warwick University); Massimo Morelli (Bocconi University and CEPR); Tommaso Sonno (London School of Economics, Université Catholique de Louvain and F.R.S-FNRS)
    Abstract: Populist parties are likely to gain consensus when mainstream parties and status quo institutions fail to manage the shocks faced by their economies. Institutional constraints, which limit the possible actions in the face of shocks, result in poorer performance and frustration among voters who turn to populist movements. We rely on this logic to explain the different support of populist parties among European countries in response to the globalization shock and to the 2008-2011 financial and sovereign debt crisis. We predict a greater success of populist parties in response to these shocks in Euro zone countries, and our empirical analysis confirms this prediction. This is consistent with voters’ frustration for the greater inability of the Euro zone governments to react to difficult-to-manage globalization shocks and financial crises. Our evidence has implications for the speed of construction of political unions. A slow, staged process of political unification can expose the EU to a risk of political backlash if hard to manage shocks hit the economies during the integration process.
    Date: 2018
  2. By: T. Aksoy; P. Manasse
    Abstract: The “great recession” has affected labor markets in Euro-area countries in very different ways. This chapter documents two important aspects of their response: the impact effect of the recession on the rate of unemployment, and the persistence of high unemployment. We find that countries lie on a trade-off between “resilience” and “persistence”: countries where the rate of unemployment is less affected on impact by output shocks (resilience) typically show higher unemployment persistence. We investigate the role of labor and product market institutions, and find evidence that more protected markets are associated to more resilience at the expense of more persistence. This suggests that implementing front loaded “structural reforms” at times of a fiscal consolidation, as many Southern European countries did during the recent crisis, may foster the rise in unemployment and possibly undermine the political support for the reforms. When we estimate the contribution of product and labor market reforms to the rise of unemployment in Southern Europe, however, we find positive, but relatively small effects that are quickly reversed.
    JEL: E02 E65
    Date: 2018–05
  3. By: Rebecca Riley; Ana Rincon-Aznar; Lea Samek
    Abstract: We analyse new industry-level data to re-examine the UK productivity puzzle. We carry out an accounting exercise that allows us to distinguish general macroeconomic patterns from sector trends and idiosyncrasies, providing a roadmap for anyone interested in explaining the puzzle. We focus on the UK market sector. Average annual labour productivity growth was 2.5 percentage points lower during the period 2011-2015 than in the decade before the financial crisis that began in 2007. We find that several years on from the financial crisis stagnation remains widespread across detailed industry divisions, pointing to economy-wide explanations for the puzzle. With some exceptions, labour productivity growth lost most momentum in those industries that experienced strong growth before the crisis. Three fifths of the gap is accounted for by a few industries that together account for less than one fifth of market sector value added. In terms of why we observe continued stagnation, we find that capital shallowing has become increasingly important in explaining the labour productivity growth gap in service sectors, as the buoyancy of the UK labour market has not been sufficiently matched by investment, although our figures suggest that the majority of the productivity gap is accounted for by a TFP gap. The collapse in labour productivity growth has been more pronounced in the UK than elsewhere, but the broad sector patterns of productivity stagnation are in many respects similar across other advanced economies, emphasising the importance of global explanations for the puzzle. UK industries that saw the biggest reductions in productivity growth tended to be internationally competitive and more dependent on global demand than other industries. They were also industries where productivity is difficult to measure.
    Keywords: productivity, competitiveness, sector studies
    JEL: E22 E23 L60 L70 L80 L90 O47
    Date: 2018–05
  4. By: Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
    Abstract: On January 15, 2015, the Swiss National Bank discontinued its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the pass-through of this unusually clean exchange rate shock into import unit values at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euros, the pass-through is immediate and complete. Second, for goods invoiced in Swiss francs, the pass-through is partial and exceptionally fast, beginning on the second working day after the exchange rate shock and reaching the medium-run pass-through after twelve working days on average.
    Keywords: Daily exchange rate pass-through, speed, large exchange rate shock
    JEL: F14 F31 F41
    Date: 2018
  5. By: Philip Molyneux (Bangor University); Alessio Reghezza (Bangor University); Ru Xie (University of Bath)
    Abstract: This paper investigates the influence of negative interest rate policy (NIRP) on bank margins and profitability. Using a dataset comprising 7242 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology, we find that bank margins and profits fell in NIRP-adopter countries compared to countries that did not adopt the policy. The results are robust to a variety of checks. This adverse NIRP effect appears to have been stronger for banks that were small, operating in competitive system as well as in countries where floating loan rates predominate.
    Keywords: Negative interest rates, bank profitability, NIMs, difference-in-differences estimation
    JEL: E43 E44 E52 G21 F34
    Date: 2018–01
  6. By: Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Johannes Puckelwald (Universität Hamburg (University of Hamburg))
    Abstract: We analyze a corpus of 564 business cycle forecast reports for the German economy. The dataset covers nine institutions and 27 years. From the entire reports we select the parts that refer exclusively to the forecast of the German economy. Sentiment and frequency analysis confirm that the mode of the textual expressions varies with the business cycle in line with the hypothesis of adaptive expectations. A calculated 'uncertainty index' based on the occurrence of modal words matches with the economic policy uncertainty index by Baker et al. (2016). The latent Dirichlet allocation (LDA) model and the structural topic model (STM) indicate that topics are significantly state- and time-dependent and different across institutions. Positive or negative forecast 'surprises' experienced in the previous year have an impact on the content of topics.
    Keywords: Sentiment analysis, text analysis, uncertainty, business cycle forecast, forecast error, expectation, adaptive expectation, latent Dirichlet allocation, structural topic model
    JEL: E32 E37 C49
    Date: 2018–05
  7. By: Xue, Dong (Cardiff Business School); Minford, Patrick (Cardiff Business School); Meenagh, David (Cardiff Business School)
    Abstract: The UK has been a net debtor over the past two decades and the sterling exchange rates are sensitive to any chaos that might occur in the Financial market. This paper examines the importance of the inter-national financial imperfections in the sterling exchange rate dynamics. We build a small open economy DSGE model with the constrained international financial institutions that intermediate capital flows, and derive tractable analytical solutions. The constraint works to introduce a wedge between lending and borrowing rates, which compensates financiers for their currency risk-taking. The model has been estimated by using a simulation-based Indirect Inference approach, which provides a natural framework for testing the hypothesis implied by the model. We find that the model cannot be rejected by the UK data. Shocks to financial forces are the main driving forces behind the large and sudden depreciation of the Sterling exchange rates in the aftermath of the collapse of Lehman Brothers and the Brexit vote. Furthermore, the optimal policy rules have been proposed.
    Keywords: Small open economy DSGE model, International financial imperfections, Sterling exchange rates, Indirect Inference, Crisis, Policy rules
    JEL: E63 F31 F34 F41 F47
    Date: 2018–05
  8. By: Michel-Pierre Chélini; Georges Prat
    Abstract: A standard specification of the WS-PS model based on wage bargaining between unions and firms makes it possible to understand the main features of long-term dynamics of unemployment and wages in France at the macroeconomic level. This result is conditional on auxiliary hypotheses made on the representations of the degree of rigidity in the labour market (depicted by a stochastic state variable), of the reservation wage (depending on the legal minimum wage), and on the nature of “other factors” pertaining to wages and prices that are not a priori specified in the WS-PS theoretical framework (summarized by the output gap). We find that the observed unemployment adjusts gradually to its equilibrium value, which is composed of three components: a “chronic” component due to the repartition in the added-value (real reservation wage, social contributions, productivity, profit margins of companies), a “cyclical” component depending on the output gap, and a “frictional” component due to the imperfect mobility of labour and technical progress. The observed wage also adjusts gradually to its negotiated value, the latter depending on the reservation wage, the social contributions, the price level, the labor productivity, the profit margins of companies, the unionization rate and on the unemployment rate whose influence is time-varying. Our results suggest that, in the average, the power of firms dominates that of unions during the negotiations, while, as predicted by the theory, change in employment intervenes effectively in the adjustment between wage desired by employees and wage offered by employers to achieve equilibrium.
    Keywords: equilibrium unemployment, wages, France
    JEL: E24 J2 J30
    Date: 2018
  9. By: Pilar Garcia-Gomez; Silvia Garcia-Mandico; Sergi Jiménez-Martín; Judit Vall-Castello
    Abstract: In this paper we analyze the association between financial incentives and retirement decisions using aggregate data for over four decades in Spain. We calculate an implicit tax rate on remaining in employment for an additional year and examine its correlation with employment rates for older workers. The results suggest that financial incentives play a role in explaining the retirement patterns of both employed and unemployed workers.
    Date: 2018–05

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