nep-eec New Economics Papers
on European Economics
Issue of 2018‒10‒22
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unemployment insurance union By Clemens, Marius; Claveres, Guillaume
  2. 57 Channels (And Nothin On): Does TV-News on the Eurozone affect Government Bond Yield Spreads? By Wolfinger, Julia; Köhler, Ekkehard A.; Feld, Lars P.; Thomas, Tobias
  3. External debt and real exchange rates’ adjustment in the euro area: New evidence from a non linear NATREX model By Cécile Couharde; Serge Rey; Audrey Sallenave
  4. Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area By Jocelyn Maillard
  5. Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure By Jasper de Jong; Niels Gilbert
  6. Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks By Giovannini, Massimo; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
  7. Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline? By Cutura, Jannic Alexander
  8. What is the EU-UK relation all about? Tracking the path from monetary integration to “ever closeness” By Corrado Macchiarelli
  9. Understanding Euro Area Inflation Dynamics: Why So Low for So Long? By Yasser Abdih; Li Lin; Anne-Charlotte Paret
  10. Household Wealth and Resilience to Financial Shocks in Italy By Daniel Garcia-Macia
  11. Structural credit ratios By Bianchi, Benedetta
  12. Permanent versus Transitory Income Shocks over the Business Cycle By Agnes Kovacs; Concetta Rondinelli; Serena Trucchi
  13. The impact of uncertainty shocks in Spain: SVAR approach with sign restrictions By Albert, Juan-Francisco; Gómez Fernández, Nerea
  14. Exchange rates and prices: evidence from the 2015 Swiss franc appreciation By Raphael Auer; Ariel Burstein; Sarah M Lein
  15. The impact of financial transaction taxes on stock markets: Short-run effects, long-run effects, and migration By Eichfelder, Sebastian; Lau, Mona; Noth, Felix
  16. EU break-up? Mapping plausible pathways into alternative futures By Niclas Meyer

  1. By: Clemens, Marius; Claveres, Guillaume
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to an optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuations of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Keywords: Unemployment insurance,search and matching,fiscal union
    JEL: E32 E61 J65
    Date: 2018
  2. By: Wolfinger, Julia; Köhler, Ekkehard A.; Feld, Lars P.; Thomas, Tobias
    Abstract: This article empirically investigates the relationship between TV news coverage on the eurocrisis and the GIIPS countries bond yield spreads with daily data between January 1, 2007 and December 1, 2016. We use 1,542,233 human coded news items from evening news shows of leading TV stations in 12 countries. These news items include 37,859 news on the EU, on the Eurozone and on country-specific economic issues related to the GIIPS countries and Germany. We find that an increasing share of news about the Eurozone reduces yield spreads, especially when the news has a positive tonality. This, at least in the short run, hints at the effectiveness of political communication through the media by European institutions and in particular the European Central Bank (ECB). In conjunction with the tonality of the news, we find some hints on country-specific news to have a significant impact on GIIPS yield spreads. A higher share of positive/negative news is positively associated with a decrease/increase the GIIPS yield spreads vis-`a-vis Germany. Despite these hardly surprising results, we find some evidence that some news is not immediately and completely priced in by market participants when it is released: we still find a significant effect of prior days news on the GIIPS bond yield spreads. In addition, we find that this peculiar effect of country specific news is stronger when the respective news is aired on the North American media market. We explain this higher coefficient as follows: North American TV news air only those news that are truly surprising and have thus a strong effect on yield spreads
    Keywords: Eurozone,Euro,political communication,media coverage,yield spreads,dynamic macro panel,FGLS
    JEL: E58 G12 L8 N14 E58 G12 L8 N14
    Date: 2018
  3. By: Cécile Couharde (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Serge Rey (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Audrey Sallenave (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon)
    Abstract: In this paper we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATREX approach which provides an explicit framework of the external debt-real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential non-linearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless, the adjustment process, while effective, is found to be low and occurs slowly.
    Keywords: Euro area,External debt,NATREX approach,Panel Smooth Transition Regression models,Real exchanges rates
    Date: 2018–09–24
  4. By: Jocelyn Maillard (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France)
    Abstract: This paper investigates the welfare consequences of labor market convergence reforms for a large range of calibrations in a two-country monetary union DSGE model with search and matching frictions. The model features trade in consumption and investment goods, price stickiness, firing costs and is calibrated to reflect the structural asymmetries of flexible and rigid countries of the Euro Area in terms of size and labor market variables. Across steady states, convergence brings welfare gains for the rigid country and welfare losses for the flexible country in most situations. The higher the flexibility induced by the convergence, the higher the gains for the rigid country and the lower the losses for the flexible country. Taking into account the transition path brings results that are qualitatively similar, but have a lower magnitude in terms of welfare gains/losses. Indeed, wage bargaining has a short-term negative impact on the rigid country and a short-term positive impact on the flexible country. As such, I conclude that convergence in labor markets can lead to substantial welfare gains in a monetary union, but only if the implementation is carefully designed.
    Keywords: Unemployment, Monetary Union, Labor Market Reform
    JEL: E32 F41 J64
    Date: 2018
  5. By: Jasper de Jong; Niels Gilbert
    Abstract: The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, is criticized for both its procyclical effects and - in contrast - a perceived lack of enforcement. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. We find that a 1% of GDP larger EDP recommendation leads to close to 1% of GDP of additional fiscal consolidation plans, and around 0.8% of actual consolidation. For countries in financial support programs we find that, while they did implement substantial consolidation measures, required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped euro area fiscal policy, especially in the years 2010-2014, when EDP recommendations were both largest and most frequent.
    Keywords: EMU; Stability and Growth Pact; fiscal policy; real-time data
    JEL: E02 E62 H30 H68
    Date: 2018–09
  6. By: Giovannini, Massimo; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
    Abstract: The trade balances of the Euro Area (EA) and of the US have improved markedly after the Global Financial Crisis. This paper quantifies the drivers of EA and US economic fluctuations and external adjustment, using an estimated (1999-2017) three-region (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, commodity prices reflect global demand and supply conditions. The paper highlights the key contribution of the post-crisis collapse in commodity prices for the EA and US trade balance reversal. Aggregate demand shocks originating in Emerging Markets too had a significant impact on EA and US trade balances. The broader lesson of this paper is that Emerging Markets and commodity shocks are major drivers of advanced countries’ trade balances and terms of trade.
    Keywords: EA and US external adjustment,commodity markets,emerging markets
    JEL: F2 F3 F4 F2 F3 F4
    Date: 2018
  7. By: Cutura, Jannic Alexander
    Abstract: This paper argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver.
    JEL: G18 G21 H81
    Date: 2018
  8. By: Corrado Macchiarelli
    Abstract: The history of European integration has been characterized by several ‘stops-and-goes’ with considerable support on political grounds. In this paper, we discuss the role of European integration for the future of the EU-UK relations. Integration, consistent with the idea of ‘completing’ the European Monetary Union (hence, a ‘Genuine Economic and Monetary Union’- GEMU), will have the obvious consequence of affecting the UK as well and the future of its negotiations with the EU. Provided that European integration worked in the past, the net benefits of staying out of the EU exante may be different from the same benefits ex-post, particularly in the likely scenario that the Union will have to ‘comprehensively’ move towards a GEMU to safeguard its integrity.
    Keywords: EMU, European integration, Brexit
    Date: 2018–09
  9. By: Yasser Abdih; Li Lin; Anne-Charlotte Paret
    Abstract: Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.
    Keywords: Inflation;Inflation expectations;Inflation persistence;Monetary policy;Econometric models;Euro Area;Phillips curve, inflation persistence and expectations, General, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–08–22
  10. By: Daniel Garcia-Macia
    Abstract: High household wealth is often cited as a key strength of the Italian economy. Both in absolute terms and relative to income, the Italian household sector is wealthier than most euro area peers. A sizable fraction of this wealth is held by the rich and upper middle classes. This paper documents the changes in the Italian household sector’s financial wealth over the past two decades, by constructing the matrix of bilateral financial sectoral exposures. Households became increasingly exposed to the financial sector, which in turn was exposed to the highly indebted real and government sectors. The paper then simulates different financial shocks to gauge the ability of the household sector to absorb losses. Simple illustrative calculations are presented for a fall in the value of government bonds as well as for bank bail-ins versus bailouts.
    Keywords: Europe;Italy;Flow of funds;financial linkages, balance sheet analysis, bail-in, bailout, Portfolio Choice
    Date: 2018–08–31
  11. By: Bianchi, Benedetta
    Abstract: This paper studies the relation between the credit-to-GDP ratio and macroeconomic trends. We estimate a long run equation on a sample of EU countries; our findings suggest that the macroeconomic factors with which the credit ratio associates most strongly are economic development, the investment share in GDP, and inflation. We then obtain projections for past and future trends. First, we study the evolution of the credit ratio in the past. We find that most of the increase starting in 1985 is associated with economic development and falling inflation, while the decrease of investment may have slowed down this trend. Second, we offer a forward-looking estimate of the structural credit ratio, defined as the long run, or sustainable, component. We offer band estimates based on two alternative assumptions on future economic outcomes, which can be interpreted as a structural and a cyclical view of current macroeconomic dynamics. Estimates of structural credit ratios based on this method are useful to policy makers having to decide on the activation of the countercyclical capital buffer, especially when assessing the sustainability of credit growth. JEL Classification: E51, G01, E44
    Keywords: credit gap, equilibrium credit, long run modelling, macro-prudential analysis
    Date: 2018–10
  12. By: Agnes Kovacs (Department of Economics, The University of Manchester; IFS); Concetta Rondinelli (Bank of Italy, Economic Outlook and Monetary Policy Directorate); Serena Trucchi (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper investigates the role of subjective income expectations in shaping consumption dynamics of European economies in the last decade. We make two main contributions. We first exploit the joint availability of income expectations and realizations in a unique micro panel-dataset to identify the levels of transitory and permanent income shocks at the individual level. We then evaluate whether these calculated income shocks can help to explain contractions in aggregate consumption over the two most recent crisis. We find strong evidence that consumption behavior during the 2012-2013 crisis can be explained by the observed income shocks, but the same is not true of the 2008-2009 crisis.
    Keywords: Persistence of income shocks, income uncertainty, expectations, consumption, financial crisis
    JEL: D12 E21
    Date: 2018
  13. By: Albert, Juan-Francisco; Gómez Fernández, Nerea
    Abstract: The purpose of this research is to quantify the impact of economic uncertainty shocks in Spain by using an SVAR approach with sign restrictions with data from January 2001 to June 2018. Specifically, we analyze temporary and persistent economic uncertainty shocks. Furthermore, we isolate the uncertainty shocks whose origin is only politic to identify potential differences in the effects of the uncertainty according to its origin. Our results suggest that positive shocks to economic and political uncertainty lead to an increase in unemployment and a fall in consumer confidence, business confidence, IBEX 35 Index and industrial production. Moreover, these negative effects of uncertainty remain for a long-time horizon, especially for the case of industrial production and unemployment. According to these results, we can conclude that economic uncertainty shocks have a significant negative impact on the Spanish economy.
    Keywords: economic uncertainty; SVAR; sign restrictions; policy uncertainty
    JEL: D81 E21 E22
    Date: 2018–10
  14. By: Raphael Auer; Ariel Burstein; Sarah M Lein
    Abstract: The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices.
    Keywords: large exchange rate shocks, exchange rate pass-through, invoicing currency, expenditure switching, price-setting, nominal and real rigidities, monetary policy
    JEL: D4 E31 E50 F31 F41 L11
    Date: 2018–10
  15. By: Eichfelder, Sebastian; Lau, Mona; Noth, Felix
    Abstract: We investigate the impact of the French 2012 financial transaction tax on trading volumes and volatility. We extend empirical research by analyzing announcement and short-run treatment effects, migration effects, and long-run volatility measures. We find a strong short-run impact on trading volume, but show that the long-run effect is small and only significant for low liquidity stocks. We also identify a reduction of long-term volatility measures after the effective date as evidence for a market-stabilizing effect, and an increase in the trading volume of substitute stocks as evidence for a migration of trading activity.
    Keywords: financial transaction tax,market quality,announcement effect,short-run treatment effect
    JEL: G02 G12 H24 M4
    Date: 2018
  16. By: Niclas Meyer
    Abstract: Following Brexit, the rise of populist Eurosceptics across the EU, Central Eastern Europe's flirtation with 'illiberal democracy' and the sovereign debt crisis, which essentially still remains unresolved ten years after it started, even some of the EU’s most enthusiastic supporters are today wondering whether the EU could actually break apart. In the paper, I propose the scenario-planning method to address this question and to think about the future of the EU in a structured way. While the method is already well established in the study of socio-technical systems, the paper tests its transferability to the political economy of the EU. Along two drivers, the material struggle to tame globalization and the ideational struggle to fill the void that is resulting from the deconstruction of neoliberalism, the paper maps four plausible pathways into alternative futures. I conclude with a discussion of the potential of scenario-planning to improve the transfer of knowledge from academia into practice.
    Keywords: EU, future, neoliberalism, populism, inequality
    Date: 2018–08

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