nep-eec New Economics Papers
on European Economics
Issue of 2018‒06‒18
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sovereign Stress, Banking Stress, and the Monetary Transmission Mechanism in the Euro Area By Holtemöller, Oliver; Scherer, Jan-Christopher
  2. Low Interest Rate Environment Amplifies Negative Effects of Austerity Policy By Mathias Klein
  3. Designing QE in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  4. Measuring the effects of conventional and unconventional monetary policy in the euro area By Anttila, Juho
  5. A Tale of Two Sectors : Why is Misallocation Higher in Services than in Manufacturing? By Daniel A. Dias; Carlos Robalo Marques; Christine Richmond
  6. The Fiscal and Welfare Consequences of the Price Indexation of Spanish Pensions By Julian Diaz Saavedra
  7. Fiscal adjustment and debt sustainability: Greece 2010-2016 and beyond By Nicholas E. Karavitis
  8. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Hintermaier, Thomas; Koeniger, Winfried
  9. Financial bridges and network communities By Casarin, Roberto; Costola, Michele; Yenerdag, Erdem
  10. If you do it, do it right: The need for a common European supervisory architecture for CCPs By Friedrich, Jan; Resch, Christian; Thiemann, Matthias
  11. What are the main obstacles to hiring after recessions in Europe? By Savšek, Simon
  12. Financial and Fiscal Shocks in the Great Recession and Recovery of the Spanish Economy By Jose Emilio Bosca; Rafael Domenech; Javier Ferri; Rodolfo Mendez-Marcano; Juan F. Rubio-Ramirez
  13. Financialisation, distribution & the macroeconomic regimes before & after the crisis: A post-Keynesian view on Denmark, Estonia & Latvia By Dünhaupt, Petra; Hein, Eckhard
  14. Employment Shocks and anti-EU Sentiment By Lechler, Marie
  15. The resilience of EU Member States to the financial and economic crisis. What are the characteristics of resilient behaviour? By Alessi, Lucia; Benczur, Peter; Campolongo, Francesca; Cariboni, Jessica; Manca, Anna Rita; Menyhert, Balint; Pagano, Andrea
  16. Fiscal Compact and Debt Consolidation Dynamics By Luca Brugnolini; Luisa Corrado
  17. The Effects of Conventional and Unconventional Monetary Policy on House Prices in the Scandinavian Countries By Signe Rosenberg
  18. Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010 By Engelbert Stockhammer; Joel Rabinovich; Niall Reddy
  19. The impact of financialisation on the wage share: a theoretical clarification and empirical test By Karsten Kohler; Alexander Guschanski; Engelbert Stockhammer

  1. By: Holtemöller, Oliver (Asian Development Bank Institute); Scherer, Jan-Christopher (Asian Development Bank Institute)
    Abstract: We investigate to what extent sovereign stress and banking stress have contributed to the increase in the level and in the heterogeneity of nonfinancial firms’ financing costs in the Euro area during the European debt crisis and how both have affected the monetary transmission mechanism. Employing a large firm-level data set containing 2 million observations, we are able to identify the effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms' financing costs in a panel model by assuming that idiosyncratic shocks to individual firms are uncorrelated with country-specific variables. We find that the two sources of stress have increased firms’ financing costs controlling for country and firm-specific factors. Moreover, we estimate both to have significantly impaired the monetary transmission mechanism.
    Keywords: banking stress; firms’ financing conditions; government bond yields; interest rate channel; monetary policy transmission; sovereign stress
    JEL: E43 E44 E52
    Date: 2018–02–19
  2. By: Mathias Klein
    Abstract: Large-scale fiscal consolidations and the implementation of structural reforms should help southern European countries resolve the crisis. But recent studies indicate that in conjunction with the low interest rate in the euro area, the austerity measures that has been imposed could have the opposite effect, leading to an increase in sovereign debt and economic slowdown. For this reason, a more balanced policy mix consisting of less restrictive spending measures and more investment incentives is preferable to an austere savings policy.
    Date: 2018
  3. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a tractable model of a monetary union with a sound fiscal governance structure and shows how in such environment the design of monetary policy above and at the lower bound constraint on short-term interest rates can be linked to well-known findings from the literature dealing with single closed economies. The model adds a portfolio balance channel to a New Keynesian two-country model of a monetary union. If the monetary union is symmetric and the portfolio balance channel is not active, the model becomes isomorphic to the canonical New Keynesian three-equation economy in which central bank purchases of long-term debt (QE) at the lower bound are ineffective. If the portfolio balance channel is active, QE becomes effective and we prove that for sufficiently small shocks there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. Shocks large enough to push the whole yield curve to the lower bound require, in addition, forward guidance. We generalise these results to an asymmetric monetary union and illustrate them through simulations, distinguishing between asymmetric shocks and asymmetric structures. In general, asymmetries give rise to current account imbalances which are, depending on the degree of financial integration, funded by private capital imports or through the central bank balance sheet channel. Moreover, our findings support that at the lower bound, as long as asymmetries between countries result from shocks, outcomes under an unconstrained policy rule can be replicated via a symmetric QE design. By contrast, asymmetric structures of the countries which matter for the transmission of monetary policy can translate into an asymmetric QE design. JEL Classification: E43, E52, E61, E63
    Keywords: lower bound, monetary policy, monetary union, quantitative easing
    Date: 2018–06
  4. By: Anttila, Juho
    Abstract: I estimate the effects of conventional and unconventional monetary policy in the euro area by using a factor-augmented vector autoregression.I complement the standard monetary policy analysis using the short rate with models where the shadow rates by Kortela (2016) and Wu and Xia (2017) are used as proxies for unconventional monetary policy. I quantify the effects of unanticipated monetary policy shocks using impulse response functions, forecast-error variance decompositions, and counterfactual simulations. The results indicate that unconventional monetary policy shocks have similar, expansionary effects on the economy as conventional monetary policy shocks.
    JEL: E43 E44 E52 E58
    Date: 2018–05–29
  5. By: Daniel A. Dias; Carlos Robalo Marques; Christine Richmond
    Abstract: Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal (2008) show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distribution. We interpret these results as stemming mainly from higher output-price rigidity, higher labor adjustment costs, and higher informality in the service sector.
    Keywords: Misallocation ; Productivity ; Firm-level data ; Structural transformation ; Gelbach decomposition
    JEL: D24 O11 O41 O47
    Date: 2018–05–29
  6. By: Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: The 2013 Spanish Pension Reform, aimed at guaranteeing the nancial sustainability of the system, introduced, among other measures, the Pension Revaluation Index (PRI), which uncouples annual pension updates from the Consumer Price Index (CPI) increases and makes the annual rise in all pensions conditional upon the system's revenue and expenditure being balanced, with ceilings and oors set in place. This automatic adjustment mechanism, however, has posed serious concerns about future pension adequacy, this being the degree of poverty alleviation and consumption smoothing that the pensions system provides to retirees, due to the expected large future reductions in the real value of the average pension. In this paper, we use a general equilibrium life cycle model, calibrated to micro and macro data in Spain, to study the scal and welfare consequences of three options for increasing pension generosity in Spain; (i) disability and minimum pensions are again fully indexed with the CPI; (ii) minimum and lower value pensions are fully indexed with the CPI; and (iii) returning to full price indexation of all Spanish pensions. While these three reforms increase, on average, pension adequacy, the tax increases needed to nance the higher future pension expenditure di er signi cantly. Moreover, most current cohorts prefer returning to the full price indexation of all Spanish pensions, but future cohorts prefer that only disability and minimum pensions be fully indexed with the CPI.
    Keywords: Computable general equilibrium, social security reform, retirement.
    JEL: C68 H55 J26
    Date: 2018–06–10
  7. By: Nicholas E. Karavitis (Panteion University)
    Abstract: This paper reviews the fiscal developments that led Greece from a successful con-vergence process and the adoption of the Euro to an unprecedented prolonged re-cession. Analysis of all fiscal aggregates reveals the policies behind the sovereign crisis, both on the expenditure and the revenue side. We employ a simple macrostatic model to identify the impact of fiscal policies on the economy through the fiscal multipliers, especially during the adjustment programmes. We attempt to explore the extent to which fiscal adjustment may have been self-defeating by developing ex post adjustment scenarios. Following this, we turn to testing debt sustainability in the long run in an interest rate sensitive environment. This is done based on a set of several varying assumptions regarding growth, fiscal performance and debt reprofiling. Analysis of the resulting scenarios points out the risks surrounding debt sustainability and draws the broad lines of future fiscal policies.
    Keywords: Greek Crisis, Fiscal Adjustment, Fiscal Multipliers, Debt Sustainability
    JEL: E62 H62 H63 H68
    Date: 2018–04
  8. By: Hintermaier, Thomas; Koeniger, Winfried
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.
    Keywords: European Household Portfolios, Consumption, Monetary Policy Transmission, International Comparative Finance, Housing
    JEL: D14 D31 E21 E43 G11
    Date: 2018–05
  9. By: Casarin, Roberto; Costola, Michele; Yenerdag, Erdem
    Abstract: The paper analyses the contagion channels of the European financial system through the stochastic block model (SBM). The model groups homogeneous connectivity patterns among the financial institutions and describes the shock transmission mechanisms of the financial networks in a compact way. We analyse the global financial crisis and European sovereign debt crisis and show that the network exhibits a strong community structure with two main blocks acting as shock spreader and receiver, respectively. Moreover, we provide evidence of the prominent role played by insurances in the spread of systemic risk in both crises. Finally, we demonstrate that policy interventions focused on institutions with inter-community linkages (community bridges) are more effective than the ones based on the classical connectedness measures and represents consequently, a better early warning indicator in predicting future financial losses.
    Keywords: Systemic Risk,Financial Institutions,Network Communities,Financial Crises
    JEL: G12 G29 C51
    Date: 2018
  10. By: Friedrich, Jan; Resch, Christian; Thiemann, Matthias
    Abstract: In the context of Brexit, changes to the regulatory architecture of CCPs that empower the European securities markets regulator are under way to prevent the threat of a regulatory race to the bottom. However, this empowerment currently leaves the national supervision of common European rules within the EU intact. This policy letter argues that supervisory arbitrage is as much a threat within the EU as outside of it, wherefore a common supervision of CCP rules in the EU is called for. The paper traces the origins of the current set-up and criticizes the current regulatory proposal by the EU Commission as too cumbersome while discussing possible ways forward to achieve European supervision. In contrast to the current proposal of the Commission, we call for a unified supervision within ESMA, combined with a European fiscal backstop.
    Keywords: Central Counterparties,European Supervisory Architecture,Capital Markets Union,regulatory arbitrage,EMIR,supervisory arbitrage
    Date: 2018
  11. By: Savšek, Simon
    Abstract: This paper assesses the relative importance of perceived obstacles to hiring workers on a permanent basis faced by EU firms and studies how they depend on firm’s characteristics. Findings suggest that the main obstacles to hiring in Europe are high uncertainty, shortage of skilled labour, high payroll taxes, high wages and the risks associated with changes to labour laws. While negative (firm-level) demand and finance shocks negatively affect firms’ perceptions of obstacles to hiring, labour market structures and firms’/employees’ characteristics are also found significant. In particular, our analysis shows that firms employing a higher percentage of skilled, permanent and experienced workers report fewer hiring obstacles. In contrast, firms under collective wage bargaining arrangements seem to report these obstacles more often. However, there are also some specific obstacles to hiring where this is not the case, which suggests that firm-level characteristics should also be taken into account when designing labour market policies. Finally, our analysis provides further tentative evidence on the impacts of labour market reforms, which seem to have a potential to address impediments towards employment creation in the EU. JEL Classification: D22, J21, J24, J63
    Keywords: employment, labour market, obstacles, structural reforms
    Date: 2018–05
  12. By: Jose Emilio Bosca; Rafael Domenech; Javier Ferri; Rodolfo Mendez-Marcano; Juan F. Rubio-Ramirez
    Abstract: In this paper we develop and estimate a new Bayesian DSGE model for the Spanish economy that has been designed to evaluate different structural reforms.
    Keywords: Working Paper , Regional Analysis Spain , Spain
    JEL: E30 E32 E43 E51 E52 E62
    Date: 2018–06
  13. By: Dünhaupt, Petra; Hein, Eckhard
    Abstract: Since the early 1980s, financialisation has become an increasingly important trend in developed capitalist countries, with different beginnings, speed and intensities in different countries. Rising inequality has been a major feature of this trend. Shares of wages in national income have declined and personal income inequality has increased. Against this background unsustainable demand and growth regimes have developed and dominated the major economies before the crisis: the "debt-led private demand boom" and the "export-led mercantilist" regime. The current paper applies this post-Keynesian approach on the macroeconomics of finance-dominated capitalism to three Baltic Sea countries, Denmark, Estonia and Latvia, both for the pre-crisis and the post-crisis period. First, the macroeconomics of finance-dominated capitalism are briefly reiterated. Second, the financialisation-distribution nexus is examined for the three countries. Third, macroeconomic demand and growth regimes are analysed, both before and after the crisis.
    Keywords: finance-dominated capitalism,financialisation,distribution,financial and economic crisis,Kaleckian theory of distribution
    JEL: D31 D33 D43 F40 F43 G01
    Date: 2018
  14. By: Lechler, Marie
    Abstract: Euroscepticism and the rise of populist parties have often been linked to economic insecurity. This paper identifies regional employment changes as causal factors for forming attitudes towards the European Union and voting for eurosceptic parties in European Parliament elections. To do so, I combine industry-specific employment data for roughly 260 European NUTS II regions with individual-level Eurobarometer survey data for the past 20 years and regional voting results. I apply panel data and instrumental variable methods; for the latter I construct a Bartik-style instrument, which predicts employment changes on the basis of regional industry specialization and Europe-wide sector specific employment growth rates. The effect of employment changes on attitudes towards the EU is particularly strong for unemployed and low-skilled workers in regions with a high share of migrants from other European member states, which supports the narrative that ‘losers of globalization’ tend to be more skeptical towards economic and political integration.
    Keywords: European Integration; Regional Employment; EU Attitudes; European Parliament Elections; EU Migration
    JEL: E24 J21 O52 P16
    Date: 2018
  15. By: Alessi, Lucia (European Commission – JRC); Benczur, Peter (European Commission - JRC); Campolongo, Francesca (European Commission - JRC); Cariboni, Jessica (European Commission - JRC); Manca, Anna Rita (European Commission - JRC); Menyhert, Balint (European Commission - JRC); Pagano, Andrea (European Commission - JRC)
    Abstract: This study presents an empirical analysis of the resilience of European countries to the financial and economic crisis that started in 2007. The analysis addresses the following questions: Which countries showed a resilient behaviour during and after the crisis? Is resilience related only to the economic dimension? Has any of the EU countries been able to use the crisis as an opportunity and 'bounce forward'? Is it possible to identify any particular country characteristics linked to resilience? The analysis is based on the JRC conceptual framework for resilience (Manca et al., 2017) which places at its core the wellbeing of individuals, thus going beyond the merely economic growth perspective. The study carefully selects a number of key economic and social variables that aim to capture the resilience capacities of our society. Resilience is measured by investigating the dynamic response of these variables to the crisis in the short and medium run. In particular, we define four resilience indicators: the impact of the crisis, the recovery, the medium-run, and the ‘bouncing forward’. Results from a narrow exercise focusing on macroeconomic and financial variables confirm the validity of the proposed measurement approach: Germany appears to be among the most resilient countries; Ireland, after having been severely hit, shows a good absorptive capacity; Italy seems to be still struggling with the recovery, while Greece remains the most affected. After measuring resilience, we identify underlying country characteristics that may be associated with resilient behaviour. As such, these could indicate entry points for policies to increase countries' resilience to economic and financial shocks.
    Keywords: resilience; absorption; adaptation; financial and economic crisis
    JEL: C15 G01 G21 G28
    Date: 2018–05
  16. By: Luca Brugnolini (Central Bank of Malta's Research Department); Luisa Corrado (DEF & CEIS,University of Rome "Tor Vergata")
    Abstract: We analyse the macroeconomic effects of a debt consolidation policy in the Euro Area mimicking the Fiscal Compact Rule (FCR). The rule requires the signatory states to target a debt-to-GDP ratio below 60%. Within the context of Dynamic Stochastic General Equilibrium models (DSGE), we augment a fully micro-founded New-Keynesian model with a parametric linear debt consolidation rule, and we analyse the effects on the main macroeconomic aggregates. To fully understand its implications on the economy, we study different debt consolidation scenarios, allowing the excess debt to be re-absorbed with different timings. We show that including a debt consolidation rule can exacerbate the effects of the shocks in the economy by imposing a constraint on the public debt process. Secondly, we note that the effect of loosening or tightening the rule in response to a shock is heterogeneous. Shocks hitting nominal variables (monetary policy shock) are not particularly sensitive. On the contrary, we prove that the same change has a more pronounced effect in case of shock hitting real variables (productivity and public spending shocks). Finally, we show that the macroeconomic framework worsens as a function of the rigidity of the debt consolidation rule. As a limiting case, we show that the effects on output, employment, real wages, inflation, and interest rates are sizable.
    Keywords: fiscal policy, debt consolidation, government spending, New-Keynesian, DSGE
    JEL: E10 E30 E62
    Date: 2018–06–08
  17. By: Signe Rosenberg
    Abstract: This paper studies the impact of conventional and unconventional monetary policy on house prices in the Scandinavian countries, using sign and zero restrictions in a Bayesian structural vector autoregressive model, covering the central banks’ policy rate and balance sheet policies over a period of nearly 30 years. Expansionary shocks of the policy rate and the balance sheet both have a positive impact on house prices in the Scandinavian countries, but the effects vary greatly within each country. In all the three countries the effect of balance sheet shocks on house prices peaks higher and is more persistent than the response of policy rate shocks. In Sweden and Denmark the impact is more sluggish in case of balance sheet shocks while in Norway the speed of the reaction is similar in case of both types of monetary policy shocks.
    Date: 2018–06–07
  18. By: Engelbert Stockhammer; Joel Rabinovich; Niall Reddy
    Abstract: Most empirical macroeconomic research limited to the period since World War II. This paper analyses the effects of changes in income distribution and in private wealth on consumption and investment covering a period from as early as 1855 until 2010 for the UK, France, Germany and USA, based on the dataset of Piketty and Zucman (2014). We contribute to the post-Keynesian debate on the nature of demand regimes, mainstream analyses of wealth effects and the financialisation debate. We find that overall domestic demand has been wage-led in the USA, UK and Germany. Total investment responds positively to higher wage shares, which is driven by residential investment. For corporate investment alone, we find a negative relation. Wealth effects are found to be positive and significant for consumption in the USA and UK, but weaker in France and Germany. Investment is negatively affected by private wealth in the USA and the UK, but positively in France and Germany.
    Keywords: historical macroeconomics, demand regimes, Bhaduri-Marglin model, wealth effects, financialisation
    JEL: B50 E11 E12 E20 E21 N10
    Date: 2018–03
  19. By: Karsten Kohler (None); Alexander Guschanski; Engelbert Stockhammer
    Abstract: It is frequently asserted that financialisation has contributed to the decline in the wage share. This paper provides a theoretical clarification and a systematic empirical investigation. We identify four channels through which financialisation can affect the wage share: (1) enhanced exit options of firms; (2) rising price mark-ups due to financial overhead costs for businesses; (3) increased competition on capital markets and shareholder value orientation; and (4) the role of household debt in increasing workers’ financial vulnerability and undermining their class consciousness. The paper compiles a comprehensive set of empirical measures of financialisation and uses it to test these hypotheses with a panel regression of 14 OECD countries over the 1992-2014 period. We find strong evidence for negative effects of financial liberalisation and financial payments of non-financial corporations on the wage share that are in the same order of magnitude as the effects of globalisation.
    Keywords: financialization, income distribution, political economy
    JEL: E25
    Date: 2018–01

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