nep-eec New Economics Papers
on European Economics
Issue of 2018‒08‒20
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Employment protection and labour market performance in European Union countries during the Great Recession By Jesus Ferreiro; Carmen Gómez
  2. Post-crisis business investment in the euro area and the role of monetary policy By Ademmer, Martin; Jannsen, Nils
  3. Brexit and CDS spillovers across UK and Europe By Jamal Bouoiyour; Refk Selmi
  4. LU-EAGLE: A DSGE model for Luxembourg within the euro area and global economy By Alban Moura; Kyriacos Lambrias
  5. Flexible wage components as a source of wage adaptability to shocks:evidence from European firms, 2010–2013 By Jan Babecký; Clémence Berson; Ludmila Fadejeva; Ana Lamo; Petra Marotzke; Pawel Strzelecki; Fernando Martins
  6. Implications of macroeconomic volatility in the Euro area By Hauzenberger, Niko; Böck, Maximilian; Pfarrhofer, Michael; Stelzer, Anna; Zens, Gregor
  7. Unconventional Monetary Policy and Bank Risk-Taking in the Euro Area By Joerg Schmidt
  8. Macroeconomic effects of an open-ended Asset Purchase Programme By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  9. When losses turn into loans: the cost of undercapitalized banks By Francisca Rebelo; Laura Blattner; Luísa Farinha
  10. A Closer Look at the Behavior of Uncertainty and Disagreement: Micro Evidence from the Euro Area By Rich, Robert W.; Tracy, Joseph
  11. We just estimated twenty million fiscal multipliers By Jesus Crespo Cuaresma; Jan Capek
  13. Immigration and Government Spending in OECD Countries By Hippolyte D'Albis; Ekrame Boubtane; Dramane Coulibaly
  14. Fiscal Multipliers in the Eurozone: A SVAR Analysis By António Afonso; Frederico Silva Leal
  15. Sovereign risk and corporate cost of borrowing: Evidence from a counterfactual study By Wolski, Marcin
  16. Credit allocation along the business cycle: evidence from the latest boom bust credit cycle in Spain By Roberto Blanco; Noelia Jiménez
  17. Did recent reforms facilitate EU labour market adjustment? Firm level evidence By Mario Izquierdo; Theodora Kosma; Ana Lamo; Simon Savsek; Fernando Martins
  18. The impact of Brexit on trade patterns and industry location: a NEG analysis By Commendatore, Pasquale; Kubin, Ingrid; Sushko, Iryna
  19. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Silvia Gabrieli; Claire Labonne
  20. The Relation between Productivity and Compensation in Europe By Paolo Pasimeni

  1. By: Jesus Ferreiro; Carmen Gómez
    Abstract: For mainstream economics, rigidities in the labour market are the primary determinants of high and persistent long-term unemployment rates, leading to the need to reform labour market institutions and make them more flexible. Flexible labour markets would not only help to smooth normal business cycle fluctuations (implying a small impact of these fluctuations on employment and unemployment) but also to reduce the negative impacts on labour market of structural shocks. If we focus on the labour market performances in the European Union during the Great Recession, we can easily detect the existence of significant differences in the impact of this common structural shock on the domestic labour markets. For mainstream economics, the countries with the best results in terms of unemployment and employment would have been those that had a more flexible labour market at the beginning of the crisis and/or those having implemented reforms to increase this flexibility.The aim of this paper is to determine the validity of this argument, that is, whether labour reforms making the labour market more flexible effectively ensure macroeconomic stability by reducing the impact on the labour market of economic shocks. Using panel data techniques, we investigate whether, as mainstream studies argue, the evolution of employment and unemployment in the EU labour markets is explained, and to what extent, by the levels and changes registered in the indicators of employment protection legislation. Conversely, we examine whether, as heterodox and post-Keynesian studies suggest, this evolution is explained by the changes registered in economic activity (i.e., GDP growth).
    Keywords: employment, unemployment, Great Recession, employment protection
    JEL: C23 E24 J21 J64 J88
    Date: 2018
  2. By: Ademmer, Martin; Jannsen, Nils
    Abstract: Business investment in the euro area strongly declined during the Global Financial Crisis and the Sovereign Debt Crisis. It has not yet rebounded to its pre-crisis trend despite the very expansionary monetary policy measures of the ECB. We analyse the sluggish recovery in business investment in the euro area and the role of monetary policy in three steps. We investigate the main factors that have impeded business investment since the Global Financial Crisis. We empirically analyse how business investment has developed compared to typical patterns during other financial crises. Based on these results, we then discuss how effective monetary policy has been in stimulating business investment since the Global Financial Crisis. We conclude that business investment in the euro area has developed broadly in line with typical post-crisis patterns. Monetary policy significantly contributed to stabilize business investment at the beginning of the crises. In the aftermath of the crises, however, there seems to be little scope for monetary policy to further stimulate investment.
    Keywords: business investment,crisis,monetary policy,local projections
    JEL: E22 E32 E52 C32
    Date: 2018
  3. By: Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Refk Selmi (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: Understanding the transmission process between markets is critical for risk management and economic policy. The objective of this paper is twofold. First, it identifies when UK and European (France, Germany, Italy and Spain) Credit Default Swaps (CDSs) exhibit explosivity with respect to their past behaviors. Second, it quantifies the dynamics of CDS volatility spillover effects surrounding the UK's EU membership referendum commonly known as " Brexit ". Using a recursive identification algorithm and new spillover measures suggested by Diebold and Yilmaz (2012), quite interesting results were drawn. We detect significant build-ups in CDS prices for all countries under study soon after the day relative to the announcement of Brexit. Besides, we show that the great uncertainty over Brexit generates significant volatility spillovers across the underlined CDS. In particular, we find that UK, Italy and Spain are the " net volatility transmitters " , while France and Germany seem the " net volatility receivers ". Such information can help policy makers in undertaking decoupling policies to (1) insulate the economy from risk spillovers effects, (2) lighten the spread of the damage done by Brexit and (3) preserve the stability of financial system. To attenuate the risk transmission across CDS markets over Brexit, regulators can, for example, put forth preventive strategies by foregrounding the most influential volatility senders (UK, Italy and Spain).
    Keywords: Volatility spillover effects,Brexit,Credit Default Swaps,Explosivity,UK,Europe
    Date: 2018–07–31
  4. By: Alban Moura; Kyriacos Lambrias
    Abstract: We describe LU-EAGLE, a DSGE model developed at the Banque centrale du Luxembourg. LU-EAGLE borrows its general structure from the Euro Area and GLobal Economy (EAGLE) model developed by the European System of Central Banks and also embeds specific features to capture some important characteristics of Luxembourg's economy. In particular, the model reproduces the high levels of exports and imports relative to GDP, as well as the significant share of cross-border workers in Luxembourg's labor market. We calibrate LU-EAGLE and discuss simulation results describing the effects of a set of standard shocks, originating both in Luxembourg and abroad. The model suggests that international spillovers make Luxembourg more responsive to monetary policy shocks and less responsive to fiscal policy shocks. Moreover, it highlights how fluctuations in foreign demand have a significant impact on domestic developments.
    Keywords: DSGE models, open economy models, policy analysis, Luxembourg.
    JEL: C54 E17 E32 E37 E62 F47
    Date: 2018–07
  5. By: Jan Babecký; Clémence Berson; Ludmila Fadejeva; Ana Lamo; Petra Marotzke; Pawel Strzelecki; Fernando Martins
    Abstract: This paper provides evidence on the role of flexible wage components as a channel for firms to adjust costs in case of the adverse shocks. It uses data from a firm-level survey for 25 European countries that covers the period 2010–2013. We find that firms subject to nominal wage rigidities, which prevent them from adjusting base wages, are more likely to cut flexible wage components in order to adjust labour costs when needed. Thus firms use flexible wage components as a buffer to overcome base wage rigidity. More generally, when base wages are able to adjust to negative shocks, the flexible wage components also react and their reaction is stronger than that of base wages.
    JEL: C81 J30 J32 P5
    Date: 2018
  6. By: Hauzenberger, Niko; Böck, Maximilian; Pfarrhofer, Michael; Stelzer, Anna; Zens, Gregor
    Abstract: In this paper we estimate a Bayesian vector autoregressive model with factor stochastic volatility in the error term to assess the effects of an uncertainty shock in the Euro area. This allows us to treat macroeconomic uncertainty as a latent quantity during estimation. Only a limited number of contributions to the literature estimate uncertainty and its macroeconomic consequences jointly, and most are based on single country models. We analyze the special case of a shock restricted to the Euro area, where member states are highly related by construction. We find significant results of a decrease in real activity for all countries over a period of roughly a year following an uncertainty shock. Moreover, equity prices, short-term interest rates and exports tend to decline, while unemployment levels increase. Dynamic responses across countries differ slightly in magnitude and duration, with Ireland, Slovakia and Greece exhibiting different reactions for some macroeconomic fundamentals. JEL Classification: C30, F41, E32
    Keywords: Bayesian vector autoregressive models, factor stochastic volatility, un-certainty shocks
    Date: 2018–08
  7. By: Joerg Schmidt (Justus-Liebig-Universitat Giessen)
    Abstract: This paper studies risk-taking by European banks. We construct a measure of risk-taking which relates changes in three month ahead expected credit standards for several non-financial private sector categories to risk of the macroeconomic environment banks operate in to re flect whether credit standards react disproportionately to changes in the monetary policy stance. We use an estimated bond market based measure to assess the overall riskiness prevailing in the economy. With this approach we shed some light on whether banks act excessively risky and provide new evidence as well as an alternative assessment on the amplifying nature of the risk-taking channel of monetary policy. We include our measure in a VAR in which structural innovations are identified with sign restrictions. The key outcomes of this paper are the following: Restrictive (expansionary) monetary policy shocks increase (decrease) our measure of risk-taking. Increases (decreases) in our measure are caused by disproportionately strong (weak) reactions in credit standards compared to the overall macroeconomic risk, especially during the recent financial crisis. Disproportionately in the sense that our macroeconomic risk measure is less affected by restrictive (expansionary) monetary policy shocks than credit standards. We conclude that expansionary monetary policy shifts the portfolio of banks to overall riskier asset holdings. The credit granting reaction depends on the category: In general, credit to non-financial corporations are less sensitive to monetary policy shocks while mortgages seem to be affected.
    Keywords: monetary policy, euro area, bank risk-taking, credit standards, sign restrictions VAR
    JEL: E44 E52 G12
    Date: 2018
  8. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: In this paper we evaluate the effectiveness of an open-ended Asset Purchase Programme (APP) for the euro area. To this purpose, we build on the large-scale New Keynesian dynamic general equilibrium model calibrated to the euro area and the rest of the world developed in Burlon et al. (2017), but, different from that contribution, we assume that the central bank does not announce the ending date of the programme, while leaving open the possibility of extending it in future periods conditionally on inflation developments. We assume that agents form their expectations about possible additional purchases beyond the horizon of the announcement by the central bank according to a rule linking them to the expected inflation gap. It is showed that the open-ended APP is more effective in immediately stimulating macroeconomic conditions than committing ex ante to an ending date. Importantly, the open-ended dimension provides a hedge against the materialization of negative euro-area aggregate demand shocks that pushes inflation away from its path towards the target. The effectiveness is further reinforced by a forward guidance on monetary policy rates.
    Keywords: central bank communication, open-ended announcement, non-standard monetary policy, DSGE models, open-economy macroeconomics, euro area
    JEL: E43 E44 E52 E58
    Date: 2018–07
  9. By: Francisca Rebelo; Laura Blattner; Luísa Farinha
    Abstract: We provide evidence that a weak banking sector has contributed to low productivity growth following the European sovereign debt crisis. An unexpected increase in capital requirements for a subset of Portuguese banks in 2011 provides a natural experiment to study the effects of reduced bank capital adequacy on productivity. Affected banks respond not only by cutting back on lending but also by reallocating credit to firms in financial distress with prior underreported loan loss provisioning. We develop a method to detect when banks delay loss reporting using detailed loan-level data. We then show that the credit reallocation leads to a reallocation of production factors across firms. A partial equilibrium exercise suggests that the resulting increase in factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: D24 E51 G21 G38 O47
    Date: 2018
  10. By: Rich, Robert W. (Federal Reserve Bank of New York); Tracy, Joseph (Federal Reserve Bank of Dallas)
    Abstract: This paper examines point and density forecasts of real GDP growth, inflation and unemployment from the European Central Bank’s Survey of Professional Forecasters. We present individual uncertainty measures and introduce individual point- and density-based measures of disagreement. The data indicate substantial heterogeneity and persistence in respondents’ uncertainty and disagreement, with uncertainty associated with prominent respondent effects and disagreement associated with prominent time effects. We also examine the co-movement between uncertainty and disagreement and find an economically insignificant relationship that is robust to changes in the volatility of the forecasting environment. This provides further evidence that disagreement is not a reliable proxy for uncertainty.
    Keywords: Disagreement; Uncertainty; Point Forecasts; Density Forecasts; Heterogeneity; ECB Survey of Professional Forecasters
    JEL: C10 C12 C23
    Date: 2018–07–24
  11. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Jan Capek (Masaryk University)
    Abstract: We analyse the role played by data and specification choices as determinants of the size of the fiscal multipliers obtained using structural vector autoregressive models. The results, based on over twenty million fiscal multiplier estimated for European countries, indicate that many seemingly harmless modelling choices have a significant effect on the size and precision of fiscal multiplier estimates. In addition to the structural shock identification strategy, these modelling choices include the definition of spending and taxes, the national accounts system employed, the use of particular interest rates or inflation measures, or whether data are smoothed prior to estimation.
    Keywords: Fiscal multiplier, structural VAR, meta-analysis
    JEL: E62 C32
    Date: 2018–08
  12. By: Walter Paternesi Meloni; Matteo Deleidi
    Abstract: Mature European countries have recently experienced a slackening in output growth and stagnating labour productivity, which may result both from poor ‘within sector’ growth and/or ‘structural change’. In this regard, the contribution of the paper is twofold. First, we assess the weight of ‘structural change’ versus ‘within sector’ growth in affecting overall productivity dynamics by means of a shift-share analysis. Second, we investigate the impact of demand factors on ‘within sector’ productivity growth by estimating the Kaldor-Verdoorn long-run coefficients in response to the dynamics of autonomous demand (1980-2015). We find that: (i) productivity growth is mainly driven by the ‘within sector effect’, with a relatively smaller role played by structural change; (ii) autonomous demand growth is relevant in determining productivity dynamics, especially in manufacturing. A major policy implication is that coordinated expansionary policies would matter for productivity growth in the EU, and at the same time contribute to sustain employment.
    Keywords: Structural Change; Tertiarisation; Shift-Share Analysis; Labour Productivity; Kaldor-Verdoorn Law.
    JEL: E24 L16 O47
    Date: 2018–07
  13. 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, PSE - Paris School of Economics, 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); Dramane Coulibaly (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper evaluates the fiscal effect of international migration. It first estimates a structural Vector Autoregressive model on a panel of 19 OECD countries over the period 1980-2015, in order to quantify the impact of a migration shock. Empirical results suggest that international migration had a positive impact on the economic and fiscal performance of OECD countries. It then proposes an original theoretical framework that highlights the importance of both the demographic structure and the intergenerational public transfers. Hence, OECD countries seems to have benefited from a \demographic dividend" of international migration since 1980.
    Keywords: Immigration,public spending,overlapping-generation model,panel VAR
    Date: 2018–08
  14. By: António Afonso; Frederico Silva Leal
    Abstract: We compute the value of fiscal multipliers (for government primary expenditure, Income and wealth taxes and for Production and import ones) in the Eurozone countries since the creation of the currency union (2001Q1-2016Q4), and to understand how the values may vary according to the public debt level, the rhythm of economic growth and the output gap. Imposing quarterly fiscal shocks in the period 2000-2016, the results shown that the government expenditure had a positive effect on output, with an annual accumulated multiplier of 0.64 while the tax multipliers presented negative signs - the Income and wealth and the Production and import taxes stood at -0.10 and -0.32, respectively. Furthermore, the multipliers shown higher values for countries with higher levels of public debt (to small levels, the expenditure multiplier is close to zero and the tax multipliers seem to have positive signs),during recessions, and in countries with positive output gaps.
    Keywords: Fiscal multiplier, Structural VAR, Fiscal policy
    JEL: B22 E62 H62 H63
    Date: 2018–08
  15. By: Wolski, Marcin
    Abstract: We assess the impact of the sovereign risk spill-overs onto corporate cost of borrowing in selected euro area countries. We utilize a novel nonparametric dependence filtering frame- work to remove the effects of sovereign risk in the interest rate pass-through context. The main findings confirm the heterogeneity in sovereign risk spill-overs. We also find divergence in sovereign risk transmission between core and peripheral Member States during financial and sovereign debt crises. We discover that the standard linear models may underestimate the underlying pass-through distortions, suggesting the existence of nonlinear sovereign risk effects.
    Keywords: counterfactual distributions,nonparametric methods,sovereign risk,cost of borrowing,pass-through
    JEL: C14 E43 E52 G21
    Date: 2018
  16. By: Roberto Blanco (Banco de España); Noelia Jiménez (Banco de España)
    Abstract: Using a dataset that merges information of loan applications from the Spanish CCR with firms’ financial accounts, we find that during the great recession access to credit of firms with weak balance sheets deteriorated relative to other firms. However, contrary to the financial accelerator theory, we find that during the recovery phase after the latest recession access to credit of weaker firms did not improve relative to other firms and it even further deteriorated somewhat. We also provide empirical evidence that lending policies of banks with firms they are exposed to before the lending decision is taken are comparatively less sensitive to public information than those applied to new firms. This result, together with the positive correlation we find between firms’ access to bank loans and the number of firms’ bank credit relationships, might be linked to the existence of private information developed by banks through their interaction with borrowers. We also find that this relationship lending contributed to smooth credit contraction during the crisis.
    Keywords: access to credit, borrower-lender relationships, loan applications
    JEL: E32 E51 G21
    Date: 2018–08
  17. By: Mario Izquierdo; Theodora Kosma; Ana Lamo; Simon Savsek; Fernando Martins
    Abstract: The paper analyses the effectiveness of the labour market reforms implemented in a number of EU countries during the recent crisis using qualitative data from a firm-level survey conducted in 2014-2015 in 25 EU countries. This data set contains information on firms’ perceptions on the easiness to adjust labour input and wages in 2013 compared to the prereform period together with firms’ and workers’ characteristics and information on the economic and institutional environment in which firms operate. We find that firms in countries that undertook wider labour markets reforms found it easier to adjust employment and wages, and they largely attribute this to the reforms in labour legislation. Consistent with the efficiency wage theory, we find that firms employing a higher share of skilled employees were less likely than those with relatively more unskilled workers to find it easier to adjust wages and lay off employees. Furthermore, firms applying firm-level agreements found it easier to adjust wages in 2013 than in 2010 suggesting that they benefited from the increased flexibility provided by these agreements.
    JEL: C81 J30 J32 P5
    Date: 2018
  18. By: Commendatore, Pasquale; Kubin, Ingrid; Sushko, Iryna
    Abstract: We explore the effects of Brexit on trade patterns and on the spatial distribution of industry between the United Kingdom and the European Union and within the EU. Our study adopts a new economic geography (NEG) perspective developing a linear model with three regions, the UK and two separated regions composing the EU. The 3-region framework and linear demands allow for different trade patterns. Two possible ante-Brexit situations are possible, depending on the interplay between local market size, local competition and trade costs: industrial agglomeration or dispersion. Considering a soft and a hard Brexit scenario, the ante-Brexit situation is altered substantially, depending on which scenario prevails. UK firms could move to the larger EU market, even in the peripheral region, reacting to the higher trade barriers, relocation representing a substitute for trade. Alternatively, some EU firms could move in the more isolated UK market finding shelter from the competition inside the EU. We also consider the post-Brexit scenario of deeper EU integration, leading to a weakening of trade links between the EU and the UK. Our analysis also reveals a highly complex bifurcation sequence leading to many instances of multistability, intricate basins of attraction and cyclical and chaotic dynamics.
    Keywords: capacity constraint, depreciation constraint, nonnegativity constraint, piecewise smooth system, border collision bifurcation, centre bifurcation
    Date: 2018–08
  19. By: Silvia Gabrieli; Claire Labonne
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereigndependence and balance sheet fragmentation alike.
    Keywords: Interbank market, credit risk, fragmentation, sovereign risk, country risk, credit rationing, market discipline
    JEL: G01 E43 E58 G15 G21
    Date: 2018
  20. By: Paolo Pasimeni
    Abstract: One of the classical problems of political economy has been to understand the relation between labour compensation and labour productivity; in more recent years, then, wage growth has become a key concern for the conduct of monetary policy by major central banks. This paper studies to what extent increases in productivity translate into increases in compensations. While previous studies had investigated this relation in the case of the US, this work enlarges the scope of the analysis to a set of 34 advanced economies over the past half century. The results show on average a significant link between growth in productivity and growth in compensation, however there is no one-to-one relation, there is instead a significant gap. Cyclical conditions as well as labour market structures greatly affect this relation. These findings imply that policies aiming at increasing productivity are a necessary but not sufficient condition to achieve also appropriate pay growth, because other factors intervene to weaken the link between the two. Although this topic has gained more prominence in the US, the analysis shows that these findings apply to the EU and to other advanced economies as well. Finally, to the extent that the gap between productivity and compensation affects aggregate demand, understanding it is crucial for the conduct of macroeconomic policies.
    JEL: D3 E24 E25 J3
    Date: 2018–03

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