nep-eec New Economics Papers
on European Economics
Issue of 2018‒09‒03
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Rethinking prices and markets underlying price-competitiveness indicators By Alberto Felettigh; Claire Giordano
  3. Euro Area Policies; Financial System Stability Assessment By International Monetary Fund
  4. Understanding Brexit: Cultural Resentment versus Economic Grievances By Norris, Pippa
  5. The Benefits of Labor Mobility in a Currency Union By Christopher House; Christian Proebsting; Linda Tesar
  6. Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing By Rischen, Tobias; Theissen, Erik
  7. Price and cost competitiveness misalignments of the euro area and of its main economies according to a quarterly BEER model, 1999-2017 By Claire Giordano
  8. Inflation News and Euro Area Inflation Expectations By Juan Angel Garcia; Sebastian Werner
  9. Managing sovereign debt restructurings in the euro zone. A note on old and current debates By Marco Committeri; Pietro Tommasino
  10. Trend Inflation and Inflation Compensation By Juan Angel Garcia; Aubrey Poon
  11. Unwinding external stock imbalances? The case of Italy’s net international investment position By Valerio Della Corte; Stefano Federico; Enrico Tosti
  12. Rollover Risk and Bank Lending Behavior: Evidence from Unconventional Central Bank Liquidity By Martina Jasova; Caterina Mendicino; Dominik Supera
  13. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  14. Brexit: The Belated Threat By D\'ora Gr\'eta Petr\'oczy; Mark Francis Rogers; L\'aszl\'o \'A. K\'oczy
  15. Dynamic Scoring of Tax Reforms in the European Union By Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
  16. The Fallacy of Fiscal Discipline By Canofari, Paolo; Piergallini, Alessandro; Piersanti, Giovanni

  1. By: Alberto Felettigh (Banca d’Italia); Claire Giordano (Banca d’Italia)
    Abstract: A comprehensive analysis of price and cost competitiveness warrants an assessment of a range of alternately deflated nominal effective exchange rates. Here, we focus solely on the price-competitiveness indicator currently published by the Bank of Italy (Felettigh et al., 2015), which is based on the producer prices of domestically-sold manufactures, and we refine its measurement. First, we update the data sources for the producer price index. Revisions mainly refer to non-euro area countries, yet also affect relative prices and therefore the price-competitiveness trends of the four main euro-area economies. These countries have performed better according to the revised indicators, in particular since 2010. Second, we present a novel three-market view of price-competitiveness indicators by splitting destination markets. The overall indicator encompassing competitive pressures on both the import and the export side can indeed be broken down into three components: the domestic market, where local producers are rivalled by foreign competitors with their import penetration; euro-area markets, where all countries compete; and non-euro-area markets, where, similarly, all countries compete. Whereas France and Germany have displayed similar price-competitiveness developments in both the euro and non-euro area markets over the entire period since 1999, Italy and Spain have performed better in the non-euro area than in the euro-area markets. Competitiveness in the domestic market and that in non-euro area markets are the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.
    Keywords: price-competitiveness indicators, real effective exchange rates, producer prices, destination markets, import competition
    JEL: F10 F30 F31
    Date: 2018–07
  2. By: MATTIA BEVILACQUA (Kent Business School, University of Kent)
    Abstract: This paper aims to examine the volatility spillovers among three asset classes, namely, equity, currency and credit among developed European countries and developing Central Eastern European countries in response to political, economic and financial events occurred in the Eurozone in the last decade. We use a different version of the Diebold-Yilmaz spillovers index in order to take into account the volatility asymmetry effect under both its leverage effect and, also, in relation to separated good or bad news. The first may be due to positive or negative shocks of identical size, whereas the latter may be due to good or bad news impacting separately. We find that the stock market is the main channel through which volatility spills over among these countries with a clear role as volatility transmitters for the developed EU stock markets. The volatility leverage effect is evident mainly for the equity market, while it emerges only after the Eurozone sovereign debt crisis for the credit market. The Brexit vote is found to be the main event contributing to volatility spillovers in the currency market with the Brittish pound transmitting positive volatility to the system. The Italian CDS market is found to play a crucial role during the Eurozone sovereign debt crisis, while the German CDS market is found to be more stable and mainly transmitting positive volatility. The European Central Banks policies, such as, LTRO and QE result into a reduction of negative volatility spillovers and into an increase of positive volatility spillovers in the credit market. According to the considered asset classes and time period, we detect positive and negative volatility spillovers among the selected countries in Europe showing how different events might contribute to different, beneficial or harmful, reactions within the system.
    Keywords: Volatility Spillovers, Asymmetric Volatility, Stock Markets, Currency Market, Credit Markets
    JEL: C58 D53 F3 G15
    Date: 2018
  3. By: International Monetary Fund
    Abstract: Overall the resilience of large euro area banks has improved, but important vulnerabilities remain. Capital buffers are in aggregate sizeable relative to immediate threats, but some banks are especially vulnerable to credit risk and others to market risks, including a substantial rise in risk premia. The banking system as a whole has ample liquidity, against a backdrop of ECB support. At a structural level, low profitability is found in many banks across all business models, despite improving conjunctural conditions. The interconnectedness analysis shows that strong buffers are effective in dampening both vulnerabilities and onward transmission. Risks to financial stability relate mainly to tighter financial conditions, weaker growth, and policy and geopolitical uncertainties. The withdrawal of the United Kingdom from the EU (Brexit) could potentially disrupt financial market and services, and thus the wider economy. Also, policy reversals could hurt debt sustainability and test the cohesion of policy making in the union.
    Date: 2018–07–19
  4. By: Norris, Pippa (Harvard U)
    Abstract: This study considers the evidence for 'demand-side' theories seeking to explain the outcome of the Brexit referendum and subsequent divisions in UK politics. Economic theories suggest that the Leave decision was driven mainly by the 'left-behinds' in jobs or wages, such as those living in struggling communities in the North of England, the Midlands, and Wales. By contrast cultural accounts emphasize political attitudes and values, including long-term British suspicion about the European Union project, public disgust with the political class at Westminster, anxiety about the effects of the refugee crisis and migration from other EU countries, and opposition to the government's austerity cuts. These theories can also be regarded as complimentary rather than rivals, for example if economic deprivation catalyzed resentment about immigrants and the rejection of open borders. To examine these issues, Part I sets out the electoral context and historical background in the run up to Brexit--and its implications for party competition in the UK. Drawing upon a larger book-length study, Part II sets out the arguments based on economic and cultural theories about the British electorate. Part III describes the evidence from the British Election Study panel surveys, which allows us to examine the factors dividing supporters in the Leave and Remain camps in the 2016 Brexit referendum, as well as those predicting support for UKIP from 2015-17. Part IV examines the impact of demographic control factors like age and sex, indicators of economic grievances, and the cultural profile of voters in their authoritarian and populist values, as well as their attitudes towards the Europe Union, immigration, and left-right ideology. The conclusion in Part V considers developments since Brexit and their implications for the future of populism in the UK. The main advocate of Brexit, UKIP, succeeded in attaining this goal, but then failed to achieve a decisive break through as a parliamentary party. Yet authoritarian-populism remains alive and well in post-Brexit Britain, absorbed into the bloodstream of the body politic, disrupting and dividing both major parties.
    Date: 2018–07
  5. By: Christopher House (University of Michigan); Christian Proebsting (EPFL); Linda Tesar (University of Michigan)
    Abstract: Cyclical unemployment rates differ substantially more between countries in the euro area than between states in the United States. We find that net migration is responsive to unemployment differentials, but the response is smaller in Europe relative to the U.S. This paper explores to what extent the lack of labor mobility in Europe makes it more difficult for the euro area to adjust to shocks. We develop a multi-country DSGE model of a currency union with cross-border migration and search frictions in the labor market. The model is calibrated to the 50-state U.S. economy and to the 31-country European economy and replicates, for each region, the relationship between net migration and unemployment differentials. The model allows us to quantify the benefits if Europe had enjoyed levels of labor mobility as high as those in the U.S. during the most recent crisis.
    Date: 2018
  6. By: Rischen, Tobias; Theissen, Erik
    Abstract: We conduct the most extensive study of underpricing in the euro area bond market so far and find strong evidence of underpricing. In cross-sectional regressions we find patterns that are consistent with bookbuilding-based theories of underpricing and inconsistent with liquidity-based explanations. The underpricing has increased considerably during the financial crisis and has remained at an elevated level since. We also show that secondary market liquidity in the euro area bond market is significantly lower in the post-crisis period than pre-crisis. These results are consistent with recent US evidence and may represent unintended side effects of new regulation enacted in the wake of the financial crisis, such as Basel III and the Volcker Rule. Furthermore, our evidence suggests that the ECB's asset purchase programs have led to a decrease in underpricing.
    Keywords: Underpricing,Bond Markets,Primary Market,Post-Crisis Regulation,ECB,Unconventional Monetary Policy,Quantitative Easing,Asset Purchase Programs
    JEL: G12 G32 E58
    Date: 2018
  7. By: Claire Giordano (Banca d’Italia)
    Abstract: This study first assesses recent misalignments of the real effective exchange rate (REER) of the euro area and of the Harmonized Competitiveness Indicators (HCIs) of its main economies, based on a quarterly Behavioural Equilibrium Exchange Rate (BEER) model. Next, it draws a comparison with comparable estimates published by the IMF and by CEPII. The BEER model here employed was first put forward by Fidora, Giordano and Schmitz (2017; 2018) and enables the assessment of the departure of actual REERs and HCIs from values consistent with underlying economic fundamentals (i.e. “equilibrium” values). The quarterly model has now been extended to cover a longer time span (1999-2017) and refined by employing new data sources, in particular relative to producer price indices, one of five alternative price/cost indicators used to derive the REERs and HCIs. There is evidence of a modest overvaluation of the euro-area REER in 2017, partly linked to the nominal appreciation of its currency in the second half of the year.
    Keywords: price competitiveness, cost competitiveness, real effective exchange rate, equilibrium exchange rate, misalignments
    JEL: E31 F00 F31
    Date: 2018–07
  8. By: Juan Angel Garcia; Sebastian Werner
    Abstract: Do euro area inflation expectations remain well-anchored? This paper finds that the protracted period of low (and below-target) inflation in the euro area since 2013 has weakened their anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands existing results in two key dimensions. First, by analyzing all available (advanced) inflation releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday frequency regressions to add robustness to our conclusions. Results point to a significant impact of inflation news over recent years that had not been observed before in the euro area.
    Keywords: Inflation;Inflation expectations;Monetary policy;Econometric models;Euro Area;inflation, market-based inflation expectations, macroeconomic news, monetary policy
    Date: 2018–07–19
  9. By: Marco Committeri (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: European economic governance is again under the spotlight. Several reform proposals have been put forward in recent years, including new arrangements for the management and resolution of sovereign debt crises. This note purports to: (a) critically review earlier debates on the reform of the international financial architecture, identifying those elements that could be still relevant for Europe today; (b) discuss recent proposals to establish a restructuring scheme in the euro area, drawing some tentative considerations on possible ways forward.
    Keywords: sovereign debt crises, euro area, IMF, financial assistance
    JEL: F33 F34
    Date: 2018–07
  10. By: Juan Angel Garcia; Aubrey Poon
    Abstract: This paper incorporates market-based inflation expectations to the growing literature on trend inflation estimation, and finds that there has been a significant decline in euro area trend inflation since 2013. This finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys. That evidence: (i) supports the expansion of ECB’s UMP measures since 2015; (ii) provides a metric to monitor long-term inflation expectations following their introduction, and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term
    Keywords: Inflation;Inflation expectations;Stochastic analysis;Econometric models;Euro Area;trend inflation, market-based inflation expectations, state space model, stochastic volatility
    Date: 2018–07–06
  11. By: Valerio Della Corte (Bank of Italy); Stefano Federico (Bank of Italy); Enrico Tosti (Bank of Italy)
    Abstract: This paper is a case study of an (almost complete) adjustment of Italy’s external stock imbalance. After reaching a peak of around 25 per cent of GDP in early 2014, Italy’s net external debtor position has steadily decreased, reaching less than 7 per cent of GDP at the end of 2017. The contribution of this work is twofold. First, it reviews the main developments in Italy’s net international investment position (NIIP) since 1999. Second, it reports a baseline projection of Italy’s NIIP over a medium-term horizon, as implied by current account balance forecasts. Since this projection ignores the role of valuation adjustments, the study also provides an analysis of their sensitivity to a set of potential movements in exchange rates and equity or bond markets.
    Keywords: international investment position, stock imbalances, valuation adjustments, current account
    JEL: F21 F32 F34 F36
    Date: 2018–07
  12. By: Martina Jasova (Princeton University); Caterina Mendicino (European Central Bank); Dominik Supera (Wharton School, University of Pennsylvania)
    Abstract: How does a sudden extension of bank debt maturity affect bank lending in times of crisis? We use the provision of long-term funding by the 2011 European Central Bank's (ECB) very long-term refinancing operations (vLTRO) as a natural experiment to address this question. Our analysis employs a novel dataset that matches the ECB monetary policy and market operations data with the firm credit registry and banks' security holdings in Portugal. We show that lengthening of bank debt maturity in crisis times has a positive and economically sizable impact on bank lending to the real economy. The effects are stronger on the supply of credit to smaller, younger, riskier firms and firms with shorter lending relationships. We also find that loan-level results translate to real and credit effects at the rm level. Finally, we discuss policy side effects and show how the unrestricted liquidity provision provided incentives to banks to purchase more securities and partially substituted away from lending to the real economy.
    Date: 2018
  13. By: Jing Cynthia Wu; Ji Zhang
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable two-country model to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between the countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    JEL: E52 F00
    Date: 2018–06
  14. By: D\'ora Gr\'eta Petr\'oczy; Mark Francis Rogers; L\'aszl\'o \'A. K\'oczy
    Abstract: Debates on an EU-leaving referendum arose in several member states after Brexit. We want to highlight how the exit of an additional country affects the power distribution in the Council of the European Union. We inspect the power indices of the member states both with and without the country which might leave the union. Our results show a pattern connected to a change in the threshold of the number of member states required for a decision. An exit that modifies this threshold benefits the countries with high population, while an exit that does not cause such a change benefits the small member states. According to our calculations, the threat of Brexit would have worked differently before the entry of Croatia.
    Date: 2018–08
  15. By: Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
    Abstract: This paper presents the first dynamic scoring exercise linking a microsimulation and a dynamic general equilibrium model for Europe. We illustrate our novel methodology by analysing hypothetical reforms of the social insurance contributions system in Belgium. Our approach takes into account the feedback effects resulting from adjustments and behavioural responses in the labour market and the economy-wide reaction to tax policy changes, essential for a comprehensive evaluation of the reforms. We find that the self-financing effect of a reduction in employers’ social insurance contribution is substantially larger than that of a comparable reduction in employees’ social insurance contributions.
    Date: 2018
  16. By: Canofari, Paolo; Piergallini, Alessandro; Piersanti, Giovanni
    Abstract: Fiscal discipline is commonly evaluated on the basis of the debt-GDP ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onwards for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.
    Keywords: Fiscal Discipline, Financial Wealth, Sustainability Indicators.
    JEL: E60 E62 H60
    Date: 2018–03–12

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