nep-eec New Economics Papers
on European Economics
Issue of 2018‒07‒30
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A shadow rate without a lower bound constraint By De Rezende, Rafael B.; Ristiniemi, Annukka
  2. Stabilisation policies to strengthen Euro area resilience By Jan Stráský; Guillaume Claveres
  3. Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Arina Wischnewsky; Matthias Neuenkirch
  4. Monetary policy and household inequality By Ampudia, Miguel; Georgarakos, Dimitris; Slacalek, Jiri; Tristiani, Oreste; Vermeulen, Philip; Violante, Giovanni L.
  5. Analyzing credit risk transmission to the non-financial sector in Europe: a network approach By Gross, Christian; Siklos, Pierre
  6. Product market integration in the Euro area By Irena Raguž Krištić; Lucija Rogić Dumančić
  7. Europe's 2020 - innovation and creative capability of the Baltic Sea Region By Wedemeier, Jan; Kruse, Mirko
  8. Missing Wage Inflation? Estimating the Natural Rate of Unemployment in a Nonlinear DSGE Model By Yuto Iwasaki; Ichiro Muto; Mototsugu Shintani
  9. The "uncovered inflation rate parity" condition in a monetary union By Nicola Acocella; Parolo Pasimeni
  10. Building a stronger and more integrated Europe By Aida Caldera Sánchez
  11. Macroeconomic evidence suggests that asylum seekers are not a “burden” for Western European countries By Hippolyte D'Albis; Ekrame Boubtane; Dramane Coulibaly
  12. European Small Business Finance Outlook: June 2018 By Kraemer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
  13. Mapping economic crisis in South Europe: Greece, Portugal and Cyprus By Georgia, Dimitriou; Metaxas, Theodore
  14. Evergreening in the Euro Area: Facts and Explanation By Sven Steinkamp; Aaron Tornell; Frank Westermann
  15. Real convergence in central, eastern and south-eastern Europe By Żuk, Piotr; Savelin, Li
  16. Building a hidden investment state? The European Investment Bank, national development banks and European economic governance By Daniel Mertens; Matthias Thiemann
  17. Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports By Meredith A. Crowley; Exton, O.; Han, L.
  18. Mapping the UK domestic and global value chains from a Brexit perspective By Escaith, Hubert
  19. The behaviour of betting and currency markets on the night of the EU referendum By Tom Auld; Oliver Linton

  1. By: De Rezende, Rafael B. (Monetary Policy Department, Central Bank of Sweden); Ristiniemi, Annukka (Financial Stability Department, Central Bank of Sweden)
    Abstract: We propose a shadow rate that measures the expansionary (contractionary) interest rate effects of unconventional monetary policies that are present when the lower bound is not binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro-area and the UK, and find that they fall (rise) when market participants expect monetary policy to become more expansionary (contractionary), and price this information into the yield curve. This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding timely, and in line with government bond yields. We show two applications for our shadow rate. First, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and assess the pass-through of each type of policy to exchange rates. We find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, a counterfactual experiment in a DSGE model suggests that inflation in Sweden would have been around 0.47 percentage points lower had the Riksbank not used unconventional monetary policy since February 2015.
    Keywords: unconventional monetary policy; monetary policy stance; term structure of interest rates; short-rate expectations; term premium
    JEL: E43 E44 E52 E58
    Date: 2018–06–01
  2. By: Jan Stráský; Guillaume Claveres
    Abstract: The euro area sovereign debt crisis highlighted important weaknesses in the euro area design. Fiscal policy did not build sufficient buffers before the crisis, which forced some countries to tighten fiscal policy too rapidly during the downturn to restore market confidence in sovereign borrowing. Despite this, sovereign stress remained high, weakening further the banking sectors highly exposed to government bonds, which in return reduced further market confidence in fiscal sustainability in case of banks’ bailout. As a result, monetary policy was the main public instrument to support the activity, but its effectiveness was reduced by the fragmentation of financial markets along national lines as the crisis deepened. In order to durably sever the links between banks and their sovereigns, euro area countries agreed on a banking union. The creation of a common supervisor was a very important step in that direction. However, further progress is needed in reducing and sharing risks, creating a common deposit guarantee scheme and the application of existing rules to ensure sufficient risk sharing can take place in case of crisis. At the same time, incentives need to be put in place for banks to progressively move away from a too high exposure to domestic sovereign bonds. A step in that direction could be the introduction of euro area safe asset, which would pool sovereign issuance from various countries, in parallel with gradual introduction of capital surcharges on sovereign exposures. Such progress may not be sufficient, however, for national fiscal policies and monetary policy to smooth a major crisis. The introduction of common fiscal stabilisation capacity is necessary to buttress the euro area in case of a deep recession, both at the country level and euro area level. Finally, policies aiming at further cross-border integration of capital markets should reinforce private risk sharing, reducing the burden on macro policies. This Working Paper relates to the 2018 OECD Economic Survey of the Euro Area. ( m)
    Keywords: Capital markets union, European deposit insurance, European safe asset, fiscal integration, macroeconomic stabilisation, risk-sharing, sovereign debt exposures of banks
    JEL: E32 E61 E62 F42 G21 H87
    Date: 2018–07–24
  3. By: Arina Wischnewsky; Matthias Neuenkirch
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks’ total asset growth and their risk assets ratio. Our dataset covers the period 2003Q1 - 2017Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find for conventional monetary policy shocks that a portfolio reallocation effect towards riskier assets is more pronounced, whereas for unconventional monetary policy shocks we detect stronger evidence for a general expansion of assets. Country-specific estimations confirm these findings for most of the euro area countries, but also reveal some heterogeneity in the shadow banks’ reaction.
    Keywords: European Central Bank, macroprudential policy, monetary policy transmission, risk-taking channel, shadow banks, vector autoregression
    JEL: E44 E52 E58 G11 G23 G28
    Date: 2018
  4. By: Ampudia, Miguel; Georgarakos, Dimitris; Slacalek, Jiri; Tristiani, Oreste; Vermeulen, Philip; Violante, Giovanni L.
    Abstract: This paper considers how monetary policy produces heterogeneous effects on euro area households, depending on the composition of their income and on the components of their wealth. We first review the existing evidence on how monetary policy affects income and wealth inequality. We then illustrate quantitatively how various channels of transmission — net interest rate exposure, inter-temporal substitution and indirect income channels— affect individual euro area households. We find that the indirect income channel has an overwhelming importance, especially for households holding few or no liquid assets. The indirect income channel is therefore also a substantial driver of changes in consumption at the aggregate level. JEL Classification: D14, D31, E21, E52, E58
    Keywords: household heterogeneity, inequality, monetary policy, quantitative easing
    Date: 2018–07
  5. By: Gross, Christian; Siklos, Pierre
    Abstract: Using variance decompositions in vector autoregressions (VARs) we model a highdimensional network of European CDS spreads to assess the transmission of credit risk to the non-financial corporate sector. Our findings suggest a sectoral clustering in the CDS network, where financial institutions are located in the center and non-financial as well as sovereign CDS are grouped around the financial center. The network has a geographical component reflected in differences in the magnitude and direction of real-sector risk transmission across European countries. While risk transmission to the non-financial sector increases during crisis events, risk transmission within the nonfinancial sector remains largely unchanged. JEL Classification: C01, C32, G01, G15
    Keywords: connectedness, contagion, credit risk, financial-real linkages, networks, systemic risk
    Date: 2018–07
  6. By: Irena Raguž Krištić (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb)
    Abstract: The goal of this paper is to determine if the euro area (EA) accession and membership had a significant impact on the product market integration in the EA countries. The paper employs LM and RALS-LM unit root tests with two breaks on the seasonally adjusted monthly Harmonized Index of Consumer Prices (HICP), from 1996:01 to 2017:05. We find EA-accession related breaks in most of the EA11 countries, but, apart from Malta, no such breaks for the later-EA-joiners. However, EA formation had a significant impact on both EA and non-EA countries at that time. We also find greater product market integration and less adverse effects after negative shocks in the EA member countries. However, based on unit root analysis, we find that EA membership in not a sufficient condition for product market integration and integration is not necessarily related to being an EA member.
    Keywords: prices, Euro area, stochastic convergence, unit root, structural breaks
    JEL: E31 O52
    Date: 2018–07–17
  7. By: Wedemeier, Jan; Kruse, Mirko
    Abstract: The ongoing structural change towards the service and knowledge societies, innovations, and the increasing integration of markets will have considerable influence on the European Union, particularly on the Eastern members of EU. In March 2010, the European Commission released the Europe-2020 strategy, which shall push the EU to be the smartest and most competitive region in the world. Among the European Union members, the Baltic Sea countries are effective in bringing up innovative cluster solutions, cooperation between science and business. Innovations are crucial for further economic development and prosperity. However, the innovation headline indicators are ambitiously defined targets of the Europe-2020 strategy. The paper at hand analyses and highlights the innovation and creative capability within the Europe 2020 strategy framework.
    Keywords: innovation,Baltic Sea Region,Europe 2020,creative sector
    JEL: O3 R11 R12 Z1
    Date: 2018
  8. By: Yuto Iwasaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ichiro Muto (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Head of Price Statistics Division, Research and Statistics Department), Bank of Japan (E-mail:; Mototsugu Shintani (Research Center for Advanced Science and Technology, University of Tokyo (E-mail:
    Abstract: During the recovery from the global financial crisis, most advanced economies have experienced a surprisingly weak response of wage inflation to the decline in unemployment. In this study, we investigate whether downward wage rigidity (DWR) is the source of the flattening wage Phillips curve and the lack of wage inflation in the four advanced economies: Japan, the euro area, the UK, and the US. Specifically, we apply Markov chain Monte Carlo methods with a particle filter to estimate a nonlinear New Keynesian dynamic stochastic general equilibrium model incorporating asymmetric wage adjustment costs. This enables us to jointly estimate the degree of DWR as well as the natural rate of unemployment, that is, the rate of unemployment expected in the absence of (downward) wage rigidity. Our results indicate that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK, but not in the US. Especially, an L-shaped wage Phillips curve between wage inflation and the unemployment gap clearly emerges in Japan, due to the presence of DWR. As for the US, wage adjustment costs are large but symmetric, which means that wages are inherently quite sticky both in an upward and downward direction. Our results suggest that missing wage inflation in Japan, the euro area, and the UK is attributable largely to DWR, but not in the US.
    Keywords: downward wage rigidity, natural rate of unemployment, Phillips curve, particle filter
    JEL: E24 E31 E32
    Date: 2018–07
  9. By: Nicola Acocella; Parolo Pasimeni
    Abstract: The uncovered interest rate parity condition lies at the heart of the "impossible trinity", stating that the three objectives of fixed exchange rates, free capital flows, and independent monetary policy cannot be pursued simultaneously. We argue that although monetary unification does indeed eliminate the tension between exchange rates and nominal interest rates, it does not solve the problem of the intrinsic instability of the system. By eliminating the intra-area exchange rates (with a single currency) and interest rate differentials (with a single common policy rate set by the common central bank), the problem of instability is simply transferred to inflation rate differentials, what we call the (impossibility of the) "uncovered inflation rate parity condition" in a monetary union. The analysis of the actual divergences and imbalances in the EMU, then, suggests that failure to respect the "uncovered inflation rate parity condition" in a monetary union may lead to increasing economic and political tensions. Thus we conclude with the application of the Rodrik's political trilemma to the EMU, which epitomises the existential challenges that the EU faces nowadays.
    Keywords: Monetary Union, interest rate, exchange rate, inflation differentials, political trilemma
    JEL: E42 F33 F41 F42
    Date: 2018
  10. By: Aida Caldera Sánchez
    Abstract: Europe’s economy is finally growing robustly. These positive developments provide an opportunity to renew efforts to meet the long-term challenges facing the European Union (EU). The EU’s record on reducing regional income disparities is mixed and this explains some of citizens’ discontent with the European project. Reforming cohesion policy by focusing spending more on items with long-term growth benefits and clear spillovers across borders, including human capital and infrastructure investment could further support income convergence. Higher co-funding rates and less burdensome administration of the cohesion and structural funds could encourage greater spending effectiveness. Sustained improvements in living standards are held back by weak productivity and investment in many countries. Reviving the single market project, by removing remaining barriers in services, energy, digital and transport can help to spur long-term growth. Deepening the single market and faster adoption of digital technologies will create new jobs but put at risk others, perhaps in lagging regions. The EU can help lagging regions catch up by reforming cohesion policy and facilitating firm creation through the removal of barriers across the single market. It can also support better those who lose out from globalisation and are displaced by technological change by making access to the European Globalisation Adjustment Fund easier and broadening its scope not only to help workers displaced by globalisation or an economic crisis, but also due to other reasons such as automation. This Working Paper relates to the 2018 OECD Economic Survey of the European Union. ( m)
    Keywords: economic integration, EU single market, Europe, inclusive growth, labour migration, productivity
    JEL: F15 F22 F36 G23 L51 L88 L98
    Date: 2018–07–24
  11. By: Hippolyte D'Albis (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Ekrame Boubtane (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Dramane Coulibaly (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper aims to evaluate the economic and fiscal effects of inflows of asylum seekers into Western Europe from 1985 to 2015. It relies on an empirical methodology that is widely used to estimate the macroeconomic effects of structural shocks and policies. It shows that inflows of asylum seekers do not deteriorate host countries' economic performance or fiscal balance, because the increase in public spending induced by asylum seekers is more than compensated for by an increase in tax revenues net of transfers. As asylum seekers become permanent residents, their macroeconomic impacts become positive.
    Keywords: panel VAR,growth,unemployment,public finances,asylum seekers,net migration
    Date: 2018–06
  12. By: Kraemer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
    Abstract: This European Small Business Finance Outlook (ESBFO) provides an overview of the main markets relevant to EIF (equity, guarantees, securitisation, microfinance). It is an update of the December 2017 ESBFO edition. We start by discussing the general market environment, then look at the main aspects of equity finance and guarantees/SME Securitisation (SMESec). Finally, before we conclude, we briefly highlight some important aspects of microfinance and Fintech in Europe.
    Date: 2018
  13. By: Georgia, Dimitriou; Metaxas, Theodore
    Abstract: The European crisis has been a subject of deep research for the past decade due to the extreme situations it has created in some countries. In this paper, we examine three of the countries that affected by the crisis: Greece, Portugal and Cyprus. The purpose of the paper is to try to understand the reasons some of these countries succeeded in overcoming the difficulties and the problems caused by the crisis while others could not find solutions easily.
    Keywords: European economy, financial crisis, debt, Southern Europe
    JEL: G01 G18
    Date: 2018
  14. By: Sven Steinkamp (Osnabrueck University); Aaron Tornell (University of California, Los Angeles); Frank Westermann (Osnabrueck University)
    Abstract: Since the beginning of the financial crisis in 2007/8, new lending in the Euro-Area has slowed sharply and the old loans experienced “evergreening,” i.e. bad loans have been rolled over rather than being liquidated. Even though ameliorating evergreening is key to promote lending for new investment projects and growth, no systematic evergreening measures exist. In this paper, we propose a new cross-country evergreening index and develop a model to explain why evergreening may reflect the incentives of regulators to forebear. Our evergreening index is based on a survey we designed, and was administered by the ifo institute to about 1,000 experts in over 80 countries. We bring the model to the data using a heteroscedastic probit model and find that evergreening is higher in: (i) Euro-Area countries than in the rest of the world; (ii) in countries facing bank distress; and (iii) is highest in countries which experience banking distress and are members of the Euro Area. These results are consistent with our theoretical model.
    Keywords: Evergreening; Central bank credit; Survey data; Forbearance
    JEL: F33 F55 E58
  15. By: Żuk, Piotr; Savelin, Li
    Abstract: This paper analyses real income convergence in central, eastern and south-eastern Europe (CESEE) to the most advanced EU economies between 2000 and 2016. The relevance of this topic stems both from the far-reaching implications of real income convergence for economic welfare and the importance of convergence for economic and monetary integration with, and within the European Union. The paper establishes stylised facts of convergence, analyses the drivers of economic growth and identifies factors that might explain the differences between fast- and slow-converging economies in the region. The results show that the most successful CESEE economies in terms of the pace of convergence share common characteristics such as, inter alia, a strong improvement in institutional quality and human capital, more outward-oriented economic policies, favourable demographic developments and the quick reallocation of labour from agriculture into other sectors. Looking ahead, accelerating and sustaining convergence in the region will require further efforts to enhance institutional quality and innovation, reinvigorate investment, and address the adverse impact of population ageing. JEL Classification: E01, F15, O11, O43, O47, O52, O57
    Keywords: central, eastern and south-eastern Europe, economic growth, EU accession, middle-income trap, real convergence, Western Balkans
    Date: 2018–07
  16. By: Daniel Mertens (Institut für Politikwissenschaft - Goethe-Universität Frankfurt am Main); Matthias Thiemann (CEE - Centre d'études européennes de Sciences Po - Sciences Po)
    Abstract: The European Commission's Investment Plan for Europe and the enduring economic crisis has brought state-owned development banks again to the fore of public and scholarly debate in Europe. This article proposes to place these banks' activities and recent institutional co-operation in the context of European integration and assumes a historical perspective on European economic governance and development banking. Most importantly, it argues that the European Investment Bank has become a centre of gravity in long-standing political attempts to increase the investment firepower of the European Union. Based on detailed process-tracing analysis through publicly available data and interview material, the article delineates a gradual process of institutional innovation and network formation that advanced since the late 1980s and culminated in recent post-crisis policy processes. The contemporary visibility of development banking in Europe, we conclude, follows from these and is representative of a nucleus for a – somewhat hidden – European investment state, whose reach and stability, however, is yet to be determined.
    Keywords: Investment Plan for Europe,European Commission,economic governance,EIB,EIF
    Date: 2018
  17. By: Meredith A. Crowley; Exton, O.; Han, L.
    Abstract: The renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016 the British electorate unexpectedly voted to leave the European Union, introducing a new era in which the UK and EU began to renegotiate the terms of the UK-EU trading relationship. We exploit this natural experiment to estimate the impact of uncertainty associated with trade agreement re-negotiation on the export participation decision of firms in the UK. Starting from the Handley and Limão (2017) model of exporting under trade policy uncertainty, we derive testable predictions of firm entry into (exit from) a foreign market under an uncertain 'renegotiation regime'. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level and cross-sectional variation in 'threat point' tariffs, we estimate that in 2016 over 5200 firms did not enter into exporting new products to the EU, whilst almost 4000 firms exited from exporting products to the EU. Entry (exit) in 2016 would have been 5.1% higher (4.3% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.
    Date: 2018–07–17
  18. By: Escaith, Hubert
    Abstract: The paper offers background information for a sectoral analysis of the Brexit implications on the UK value chains. It analyses trade data through the specific angle of inter-industrial relation-ships and international supply chains, including employment implications. The paper benchmarks UK against other key G-20 countries for three specific industries that have a particular relevance from an inter-industrial perspective: Transport equipment, Chemicals and Electronics. In the pro-cess, a number of stylised facts are identified and several synthetic indicators are produced. Be-cause a hard Brexit is expected to increase trade costs and affect prices, the paper estimates the impact of additional tariff and non-tariff trade costs on the competitiveness of these three sectors. Hopes that a devaluation of the Pound may compensate for higher trade costs must take into con-sideration that devaluation affects only the domestic share of the value-added, requiring larger exchange rate adjustment. In the case of Transport equipment, the required devaluation is around 30% if all tariff and non-tariff trade costs are passed to the producers.
    Keywords: Global Value Chains; BREXIT; input-output analysis; network analysis; trade costs; competitiveness
    JEL: C67 F14 F15
    Date: 2018–07–10
  19. By: Tom Auld (Institute for Fiscal Studies); Oliver Linton (Institute for Fiscal Studies and University of Cambridge)
    Abstract: We study the behaviour of the Betfair betting market and the sterling/dollar exchange rate (futures price) during 24 June 2016, the night of the EU referendum. We investigate how the two markets responded to the announcement of the voting results. We employ a Bayesian updating methodology to update prior opinion about the likelihood of the final outcome of the vote. We then relate the voting model to the real time evolution of the market determined prices. We find that although both markets appear to be inefficient in absorbing the new information contained in vote outcomes, the betting market is apparently less inefficient than the FX market. The different rates of convergence to fundamental value between the two markets leads to highly profitable arbitrage opportunities.
    Keywords: EU Referendum, Prediction Markets, Machine Learning, Efficient Markets Hypothesis, Pairs Trading, Cointegration, Bayesian Methods, Exchange Rates
    Date: 2018–01–10

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