nep-eec New Economics Papers
on European Economics
Issue of 2018‒10‒15
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Immigrants, Labor Market Dynamics and Adjustment to Shocks in the Euro Area By Gaetano Basso; Francesco D'Amuri; Giovanni Peri
  2. Corporate cost and profit shares in the euro area and the US: the same story? By Vicente Salas; Lucio San Juan; Javier Vallés
  3. The Future of Eurozone Fiscal Governance By Sarah Ciaglia; Clemens Fuest; Friedrich Heinemann
  4. Is Austria’s Economy Locked-in in the CESEE Region? Austria’s Competitiveness at the Micro-level By Mahdi Ghodsi
  5. The North-South Divide, the Euro and the World By Konstantinos Chisiridis; Kostas Mouratidis; Theodore Panagiotidis
  6. A Closer Look at the Behavior of Uncertainty and Disagreement: Micro Evidence from the Euro Area By Rich, Robert W.; Tracy, Joseph
  7. Spillovers of monetary policy across borders: International lending of Dutch banks, insurers and pension funds By Jon Frost; Patty Duijm; Clemens Bonner; Leo de Haan; Jakob de Haan
  8. Deviations in real exchange rate levels in the OECD countries and their structural determinants By Martin Berka; Daan Steenkamp
  9. "Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis" By Joerg Bibow
  10. Economic Integration and State Capacity: Evidence from the Eastern Enlargement of the European Union By Bruszt, Laszlo; Campos, Nauro F
  11. What core inflation indicators measure? By Aleksandra Hałka; Grzegorz Szafrański
  12. The Potential Macroeconomic and Sectoral Consequences of Brexit on Ireland By Christine Arriola; Caitlyn Carrico; David Haugh; Nigel Pain; Elena Rusticelli; Donal Smith; Frank van Tongeren; Ben Westmore
  13. Financial frictions, real estate collateral, and small firm activity in Europe By Banerjee, Ryan N.; Blickle, Kristian S.
  14. Is the debt brake behind Germany's successful fiscal consolidation? By Rietzler, Katja; Truger, Achim
  15. Arbitrage Risk and Investor Sentiment as Causes of Persistent Mispricing: the European Evidence By Massimo Guidolin; Andrea Ricci
  16. Monetary Policy across Space and Time By Liu, Laura; Matthes, Christian; Petrova, Katerina
  17. MPC Heterogeneity in Europe: Sources and Policy Implications By Miguel Ampudia; Russell Cooper; Julia Le Blanc; Guozhong Zhu
  18. Systemic liquidity concept, measurement and macroprudential instruments By Liquidity, ECB Task Force on Systemic; Bonner, Clemens; Wedow, Michael

  1. By: Gaetano Basso; Francesco D'Amuri; Giovanni Peri
    Abstract: We analyze the role of labor mobility in cushioning labor demand shocks in the Euro Area. We find that foreign born workers’ mobility is strongly cyclical, while this is not the case for natives. Foreigners’ higher population to employment elasticity reduces the variation of overall employment rates over the business cycle: thanks to them, the impact of a one standard deviation change in employment on employment rates decreases by 6 per cent at the country level and by 7 per cent at the regional level. Additionally, we compare Euro Area mobility to that of another currency union, the US. We find that the population to employment elasticity estimated for foreign-born persons is similar in the Euro Area and the US, while EA natives are definitely less mobile across countries than US natives are across states in response to labor demand shocks. This last result confirms that in the Euro Area there is room for improving country specific shocks absorption through higher labor mobility. It also suggests that immigration helped labor market adjustments.
    JEL: E32 F22 J6
    Date: 2018–09
  2. By: Vicente Salas (Universidad de Zaragoza); Lucio San Juan (Banco de España); Javier Vallés (Banco de España)
    Abstract: This paper presents evidence of how the shares of labour and capital costs and profits in the gross value added of corporate sectors of France, Germany, Italy, Spain and the US varied between 1995 and 2016, and seeks to explain the differences between countries and how they have developed over time. The descriptive evidence does not support the hypothesis of a convergence in the composition of the countries’ corporate gross value added in the period, either within the euro area or between Europe and the US, nor is there evidence of a generalised downward trend in the share of labour costs over time. The parallel upward trend in the corporate profit share of the US and Germany between 2000 and 2016 stands out, with German corporate profit share consistently above that of the US. The evidence presented here supports the claim made by other studies that increasing corporate market power is the main driver of changes in the composition of gross value added over time in the case of the US. In the euro area countries, labour and capital shares are also sensitive to changes in the relative input prices of labour and capital (consistent with an inferred elasticity of substitution between labour and capital in production that is less than one, compared with the inferred value of one for the US). Finally, to explain the high and increasing German corporate profit share, it is necessary to account for the sustained comparative production cost advantage of German corporations.
    Keywords: labour and capital cost shares; economic profit shares; elasticity of substitution between labour and capital; market power; euro area countries and the US.
    JEL: E25 E22 O4
    Date: 2018–10
  3. By: Sarah Ciaglia; Clemens Fuest; Friedrich Heinemann
    Abstract: Despite the great achievements for peace and economic prosperity, the European project has recently been challenged with public support being on decline in many member states, culminating in the decision of the United Kingdom to leave the EU. Against this background, this study looks into ‘European identity’ as a concept of fundamental importance for European integration. In the economic literature, ‘identity’ has been increasingly recognized as a crucial driver of individual behavior with joint group identities as a precondition for trustful cooperation. Hence, some type of European identity (in addition to, not replacing national identities) can be regarded as one of the underlying preconditions for the European project. Against this background, this study develops the contents and nuances of the ‘European identity’ terminology as distinct from other categories like EU support. It empirically describes ongoing trends and comprehensively summarizes the literature’s insights on the important determinants of European identity. On the basis of identified determinants and target groups a classification of measures to promote European identity is developed. This classification is based on the distinctions between a ‘civic’ and a ‘cultural’ European identity on the one hand and between the ‘input’ and ‘output legitimacy’-creating function of potential measures. Based on this classification and survey of possible approaches for the advancement of European identity we give a broad overview on possible approaches to foster European identity. We elaborate six proposals in more detail: transnational party lists, an EU Citizens’ Assembly, EU consular offices, Pensioners’ Erasmus, a ‘European Waltz’ program, and an EU public service broadcaster.
    Date: 2018
  4. By: Mahdi Ghodsi (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper analyses the competitiveness of Austrian manufacturing industries by comparing the performance of Austrian firms with the Western European firms using recent estimates of TFP across Wider Europe (EU-28 plus Western Balkans) during the period 2007-2015. According to the TFP estimates, Austrian firms with larger turnovers, and less employment, in regions with less regional-industrial concentration of labour have become more competitive in terms of TFP. Using firm’s TFP and other characteristics aggregated by industries across Wider Europe, a gravity model for exports is estimated. Results show that larger trade across countries in the sample is driven by intra-firm trade, better efficiency of industries in terms of simple average of TFP growth of firms and more allocation of capital to more efficient firms. Comparing the actual values of exports from Austria to CESEE with the predicted values of the gravity model, I found that since 2012 excessive exports were directed to Western Europe rather than to CESEE. In a robustness check using unilateral exports value, these interesting findings also confirmed that a potential Austrian lock-in effect in the CESEE region reversed and trade diverged to the more competitive market of Western Europe.
    Keywords: firm performance, total factor productivity (TFP), gravity model, exports performance, lock-in effect
    JEL: D22 D24 F14 F15 F23 L25
    Date: 2018–10
  5. By: Konstantinos Chisiridis (Department of Economics, University of Macedonia, Greece); Kostas Mouratidis (Department of Economics, University of Sheffield, UK); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece)
    Abstract: The European north-south divide has been an issue of a long-standing debate. We employ a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro-area framework. The aim is to assess the propagation mechanisms of real shocks, focusing on the interconnections among the north euro area and the south euro area. We incorporate theory-based long-run restrictions and examine the effects of (i) non-export real output shocks, (ii) expansionary shocks and (iii) real exchange rate shocks. The results provide support for symmetric adjustment in the euro area; an expansionary policy of the north euro area and increased competitiveness in the south euro area can alleviate trade imbalances of the debtor euro area economies. From the south euro area perspective, internal devaluation is the most beneficial policy. North euro area and U.S. origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia while the strong linkage between trade flows within the euro area is confirmed.
    Keywords: North-South Euro Area Trade Imbalances, Global Trade Imbalances, International Linkages, Global VAR, Spillover Effects
    JEL: C33 E27 F14
    Date: 2018–10
  6. By: Rich, Robert W. (Federal Reserve Bank of Cleveland); 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 C23 E37
    Date: 2018–09–28
  7. By: Jon Frost; Patty Duijm; Clemens Bonner; Leo de Haan; Jakob de Haan
    Abstract: We analyze the relationship between ECB monetary policy and international lending by Dutch financial institutions. Our results suggest that banks hardly change their foreign lending in response to policy changes. We find some evidence in support of the portfolio channel (in response to a contractionary shock, better capitalized banks increase their foreign lending less than banks with lower capital) and the bank lending channel (larger banks lend more after a contractionary shock than small banks). Insurers and pension funds do not respond to ECB monetary policy, but increase lending when banks in the host country are constrained by prudential regulation.
    Keywords: Monetary policy; international banking; pension funds; insurers; spillovers
    JEL: F42 F44 G15 G21
    Date: 2018–10
  8. By: Martin Berka; Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: The most commonly used theoretical framework describing why prices in some countries are higher than in others (i.e. explaining deviations from purchasing power parity) is the Balassa-Samuelson model. The Balassa-Samuelson model implies that stronger productivity growth should tend to cause a country's real exchange rate to appreciate. This paper develops measures of productivity and real exchange rate levels across industries and countries to allow the Balassa-Samuelson hypothesis to be tested. We show that the model finds empirical support in 17 OECD economies: there is a link between real exchanges and sectoral productivity levels both across countries and over time. We then show theoretically and empirically that relaxing the model's assumptions about wage determination and the role of labour market differences across sectors and countries helps improve the performance of the model. However, there remains large unexplained deviations in real exchange rates across countries that the model cannot account for.
    Date: 2018–10
  9. By: Joerg Bibow
    Abstract: This study investigates the evolution of central bank profits as fiscal revenue (or: seigniorage) before and in the aftermath of the global financial crisis of 2008-9, focusing on a select group of central banks--namely the Bank of England, the United States Federal Reserve System, the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Eurosystem (specifically Deutsche Bundesbank, Banca d'Italia, and Banco de Espana)--and the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual "normalization." Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks' financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by "own" resources. Essentially, the central bank's income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. This analysis sheds new light on the interdependencies between monetary and fiscal policies. Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, this study's findings also indicate significant changes regarding central banks' profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.
    Keywords: Central Bank Profits; Seigniorage; Financial Crisis; Unconventional Monetary Policy; Monetary and Fiscal Policy; Central Bank Capital; Helicopter Money; Cryptocurrencies; Bitcoin
    JEL: E41 E52 E58 E62 E65 G01
    Date: 2018–10
  10. By: Bruszt, Laszlo (Central European University); Campos, Nauro F (Brunel University)
    Abstract: We investigate whether and how economic integration increases state capacity. This important relationship has not been studied in detail so far. We put together a conceptual framework to guide our analysis that highlights what we call the Montesquieu, Weber and Smith channels. Each of these correspond to a series of mechanisms in three distinct institutional arenas: judiciary, bureaucracy, and competition policy. To test our framework, we introduce a new panel of institutional reform measures which allow us to investigate how changes in these three arenas interact with each other and what sequence of changes yields increase in state capacity. The yearly data set covers all the 17 countries that became candidates to join the European Union (EU) after the 1995 enlargement. Our main finding is that the relationship between bureaucratic independence and judiciary capacity seems to be the key engine of the process of state capacity building engendered by the prospect of EU membership. Deep integration, we find, can induce broad institutional change by providing incentives for simultaneous change in core state institutions. Yet early and abrupt removal of external anchors might generate significant backsliding, or reversals, in domestic institutional change.
    Keywords: deep integration, state capacity, European Union accession, judiciary, bureaucracy, competition policy
    JEL: D72 D78 H23 P11 P16
    Date: 2018–08
  11. By: Aleksandra Hałka (Narodowy Bank Polski); Grzegorz Szafrański (Narodowy Bank Polski)
    Abstract: Whether excluding food and energy components from overall price indices produces a useful indicator for monetary policy purposes is widely debated. The proposals of model based measures of underlying inflation are scarce and the evidence on their performance is limited. In the paper the multidimensional performance of exclusion and model based core inflation indicators is compared in the period of persistently low inflation and interest rates. Providing new measures of underlying inflation we look for specific features of such indices as: tracking trend, appropriate smoothing, unbiasedness with respect to the cost-of-living index, good approximation of the demand pressure, and good short- to medium-term forecasting abilities. To this end, we extract permanent and transitory components of headline HICP and core inflation in the sample of 26 European Union countries for the period 2002-2016 using bivariate unobserved correlated components model and maximum likelihood estimator. We construct an aggregate performance measure, named Core Inflation Score, to capture different dimensions of underlying inflation indicators which could be of interest in monetary policy analysis.
    Keywords: core inflation, unobserved correlated components model, forecasting inflation.
    JEL: E31 E52
    Date: 2018
  12. By: Christine Arriola; Caitlyn Carrico; David Haugh; Nigel Pain; Elena Rusticelli; Donal Smith; Frank van Tongeren; Ben Westmore
    Abstract: This paper provides estimates of the potential effects on exports, imports, production, factor demand and GDP in Ireland of an exit of the United Kingdom (UK) from the European Union (EU), focusing on trade and FDI channels. Owing to the high uncertainty regarding the final trade agreement between the negotiating parties, the choice has been made to assume a worst-case outcome where trade relations between the United Kingdom and EU are governed by World Trade Organization (WTO) most favoured nation (MFN) rules. In doing so, it provides something close to an upper bound estimate of the negative economic impact taking into account the potential for some firms to relocate to Ireland. Any final trade agreement that would result in closer relationships between the United Kingdom and the EU could reduce this negative impact. The simulations use two large-scale models: a global macroeconomic model (NiGEM) and a general equilibrium trade model (METRO). These models are used to quantify, both at the macroeconomic and the sectoral level, two key channels through which Ireland would be affected: trade and foreign direct investment. The simulation results highlight that the negative effect on trade could result in Ireland's GDP falling by 1½ per cent in the medium-term and around 2½ per cent in the long-term. The impacts are highly heterogeneous across sectors. Agriculture, food, and some smaller manufacturing sectors experience the largest declines in total gross exports at over 15%. By contrast, financial services exports increase slightly. The modelling suggests that any positive offsetting impact to the trade shock from increased inward FDI to Ireland is likely to be modest.
    Keywords: Brexit, computable general equilibrium model, European Union, foreign direct investment, international trade, Ireland, METRO model, NIGEM macroeconometric model, sectoral economic effects
    JEL: C10 C68 F13 F14 F47
    Date: 2018–10–11
  13. By: Banerjee, Ryan N. (Bank for International Settlements); Blickle, Kristian S. (Federal Reserve Bank of New York)
    Abstract: We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this heterogeneity may relate to financial frictions in a country. We confirm the model’s propositions in a number of empirical analyses for the following countries in Northern and Southern Europe: the United Kingdom, Norway, France, Italy, Spain, and Portugal. Small firms in countries with higher financial frictions (for example, places where bankruptcy resolution is more difficult and/or takes longer) see a greater dependence on “stable” real estate collateral. This is most pronounced for opaque (for example, very young) firms. Through an extension to our model and our choice of specification, we show that our findings are most consistent with a collateral-value-based credit supply channel and rule out a consumer-driven demand effect.
    Keywords: firm financing; real estate collateral; credit supply; bankruptcy laws; financial frictions
    JEL: G30 G33 K11 O47 R30
    Date: 2018–10–01
  14. By: Rietzler, Katja; Truger, Achim
    Abstract: Both the German federal as well as the general government recorded a surplus for the fourth time in a row in 2017. The fast consolidation after the Great Recession coincided with the transition period for the full introduction of the federal debt brake, which is sometimes interpreted as causality. At the same time Germany's economic performance is better than that of many other countries. For this reason it is nearly impossible to overrate the symbolic power of the debt brake as a seeming success story. In this paper we scrutinise the seeming success story of the debt brake. We carry out a comparative analysis of the "structural" consolidation of public finances in Germany for the period from 1991 until 2017 showing that the German debt brake is not the cause of the successful budget consolidation in Germany since 2010. The improvement of the general government finances since 2010 was smaller than in previous consolidation phases and was strongly supported by a favourable macroeconomic environment, and one-off effects. Finally, neither the general government sector nor the federal government would be in such a good fiscal shape, had the economy evolved less favourably since 2010. Without the blessing of a strong upswing Germany would hardly have become the fiscal role model for Europe and the German debt brake would not have become the blueprint for the European Fiscal Compact.
    Keywords: Germany,debt brake,consolidation,Euro crisis,sovereign debt
    JEL: E39 E62 H H62 H74
    Date: 2018
  15. By: Massimo Guidolin; Andrea Ricci
    Abstract: We investigate the relationship between risk-adjusted returns, arbitrage risk and arbitrage asymmetry, and investor sentiment in the European stock market. Under the assumption that idiosyncratic volatility (IVOL) causes arbitrage risk, we analyze the effects of IVOL on the-abnormal returns of the Euro Stoxx 50 large cap constituents. After classifying the stocks in two mispricing categories, we uncover evidence of arbitrage risk especially in the overpriced group: the highest IVOL overpriced portfolio is the most overpriced, which implies persistent subsequent risk-adjusted returns that slowly revert to zero. When the estimation is performed afresh separating the high- from the low-sentiment periods and controlling for macroeconomic conditions, we find evidence of a negative relation between investor sentiment and IVOL effects, which is yet more pronounced for the highest arbitrage-risk stocks, which is consistent with pure, psychological biases strongly affecting the impact of arbitrage risk on the speed of correction of mispricing.
    Keywords: Arbitrage risk, arbitrage asymmetries, idiosyncratic volatility, cross section of stock returns, large caps
    JEL: G11 G17 G12 C53
    Date: 2018
  16. By: Liu, Laura (Federal Reserve Board of Governors); Matthes, Christian (Federal Reserve Bank of Richmond); Petrova, Katerina (University of St. Andrews)
    Abstract: In this paper we ask two questions: (i) is the conduct of monetary policy stable across time and similar across major economies, and (ii) do policy decisions of major central banks have international spillover effects. To address these questions, we build on recent semi-parametric advances in time-varying parameter models that allow us to increase the VAR dimension and to jointly model three advanced economies (US, UK, and the Euro Area). In order to study policy spillovers, we jointly identify three economy-specific monetary policy shocks using a combination of sign and magnitude restrictions.
    Keywords: Monetary policy spillovers; time-varying parameters; changing volatility
    JEL: C54 E30 E58
    Date: 2018–08–13
  17. By: Miguel Ampudia; Russell Cooper; Julia Le Blanc; Guozhong Zhu
    Abstract: This paper studies household financial choices in four EU countries. The estimation of key parameters uses a simulation method of moments approach to match moments on asset market participation rates, portfolio shares and wealth to income ratios by education group and country. The policy functions based upon the estimation are used to characterize the distributions of the marginal propensity to consume across households for each of the four countries. The distributions are directly related to the presence of hand-to-mouth households. With the estimated distributions, monetary policy, operating through its effects on household income and asset market returns, will have a differential impact on individuals within and across countries.
    JEL: E21 E52
    Date: 2018–09
  18. By: Liquidity, ECB Task Force on Systemic; Bonner, Clemens; Wedow, Michael
    Abstract: This study provides a conceptual and monitoring framework for systemic liquidity, as well as a legal assessment of the possible use of macroprudential liquidity tools in the European Union. It complements previous work on liquidity and focuses on the development of liquidity risk at the system-wide level. A dashboard with a total of 20 indicators is developed for the financial system, including banks and non-banks, to assess the build-up of systemic liquidity risk over time. In addition to examining liquidity risks, this study sheds light on the legal basis for additional macroprudential liquidity tools under existing regulation (Article 458 of the Capital Requirements Regulation (CRR), Articles 105 and 103 of the Capital Requirements Directive (CRD IV) and national law), which is a key condition for the implementation of macroprudential liquidity tools.
    Date: 2018–10

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