nep-eec New Economics Papers
on European Economics
Issue of 2018‒10‒29
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Beyond spreads: measuring sovereign market stress in the euro area By Garcia-de-Andoain, Carlos; Kremer, Manfred
  2. Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area By Pietro Grandi
  3. The effect of the Eurosystem expanded Asset Purchase Programme on inflation expectations: evidence from the ECB Survey of Professional Forecasters By Guido Bulligan
  4. Are UK industries resilient in dealing with uncertainty? The case of Brexit By Jamal Bouoiyour; Refk Selmi
  5. Inflation dynamics during the Financial Crisis in Europe: cross-sectional identification of long-run inflation expectations By Dany-Knedlik, Geraldine; Holtemöller, Oliver
  6. Quantifying Welfare Gains of Increased Trade Integration By Jung, Benjamin; Felbermayr, Gabriel; Gröschl, Jasmin
  7. Incentives for the finance sector: How the ECB affects banks' business assembling By Bernard Michael Gilroy; Alexander Golderbein; Christian Peitz; Nico Stöckmann
  8. Theories, techniques and the formation of German business cycle forecasts: Evidence from a survey of professional forecasters By Döpke, Jörg; Waldhof, Gabi; Fritsche, Ulrich
  9. The political economy of monetary solidarity: revisiting the Euro experiment By Schelkle, Waltraud
  10. Sovereign Bond Yields Spreads Spillovers in the EMU By António Afonso; Mina Kazemi
  11. ALICE: A new inflation monitoring tool By de Bondt, Gable J.; Hahn, Elke; Zekaite, Zivile
  12. Interest rate spreads and forward guidance By Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
  13. Exchange rate pass-through into euro area inflation. An estimated structural model By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  14. The macroeconomic implications of the European Social Fund: An impact assessment exercise using the RHOMOLO model By Stylianos Sakkas
  15. Is globalisation taking away jobs? An empirical assessment for advanced economies By Antonia Lòpez-Villavicencio; Luis Reyes Ortiz
  16. Monopsony in the UK By Will Abel; Silvana Tenreyro; Gregory Thwaites
  17. Who bears interest rate risk? By Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
  18. A proposal for a Brexit deal: Why a free trade area for goods is in the interest of the EU and how to achieve a sound balance of rights and obligations By Matthes, Jürgen; Voigtländer, Michael
  19. What drives updates of inflation expectations? A Bayesian VAR analysis for the G-7 countries By Belke, Ansgar; Beckmann, Joscha; Dubova, Irina

  1. By: Garcia-de-Andoain, Carlos; Kremer, Manfred
    Abstract: In this paper we propose a composite indicator that measures multidimensional sovereign bond market stress in the euro area as a whole and in individual euro area member states. It integrates measures of credit risk, volatility and liquidity at short-term and long-term bond maturities into a broad measure of sovereign market stress. The statistical framework builds on that of the ECB’s Composite Indicator of Systemic Stress (CISS) developed by Hollo, Kremer and Lo Duca (2012), so that we call our metric the Composite Indicator of Systemic Sovereign Stress or “SovCISS”. We implement the SovCISS for eleven euro area member states and also present four options of a SovCISS for the entire monetary union. In addition, we suggest a linear decomposition of the SovCISS, singling out contributions of the different components and of the time-varying correlations across these components. Comparing develoments in the SovCISS and the CISS over the crisis period clearly illustrates the usefulness of the latter for the real-time monitoring of systemic instabilities in the financial system as a whole. Finally, an application of the country-specific SovCISS indicators to the VAR-based spillover literature suggests that stress mainly originates from a few euro area countries, and that spillover patterns vary over time. JEL Classification: C43, E44, F45, G01, H63
    Keywords: financial stress index, sovereign debt crisis, spillover index, systemic risk
    Date: 2018–10
  2. By: Pietro Grandi (Université Panthéon Assas (Paris 2), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? This paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy affected similar banks located in different countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were differently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy – as captured by the ECB shadow rate – was also unevenly transmitted to bank lending. Exposure to sovereign risk is identified as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmitted to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries. These findings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.
    Keywords: Bank lending channel,Monetary policy transmission,Cross-country heterogeneity,Sovereign risk,Financial structures,Banking integration
    Date: 2018–09–21
  3. By: Guido Bulligan (Banca d’Italia)
    Abstract: This paper investigates the effect of ECB asset purchases on inflation expectations in the euro area, as measured by the ECB Survey of Professional Forecasters. To identify the effects on individual expectations we adopt a panel approach, where the Eurosystem Asset Purchase Programme (APP) shocks are used as covariates to explain the revisions in the individual inflation forecasts; controls for updates in macroeconomic and financial developments are also included. Our results indicate that the first APP announcement in January 2015 resulted in a statistically significant upwards revision of medium term inflation expectations and lowered the forecasters’ assessment of the probability of a low inflation regime. The average effect however masks significant differences among forecasters: forecasters that were relatively more accurate prior to the announcement were also those who revised their inflation forecasts more markedly.
    Keywords: monetary policy announcements, event study, inflation expectations, unconventional monetary policy
    JEL: E31 E52 E58 E65 G14
    Date: 2018–10
  4. 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: Given the European Union (EU)'s central role in regulating various sectors, the decision to leave poses profound questions for UK industries in upheaval. This paper examines –at sectoral level– the dynamics of stock prices surrounding the announcement of the UK's EU membership referendum on 24 June 2016. Assessing seven sectors of British stock index, we show that the Brexit had a significant impact on the valuation of UK companies. While all industries face increasing uncertainty, the referendum outcome had varying sectoral effects. Specifically, the responses of banks and financial services, defense and airlines, real estate and technology to the Brexit event were even more severe than the reactions of oil and gas, pharmaceuticals and consumer goods. The lack of opportunity to benefit from the European passporting rules to establish businesses, to access to EU's Research and Development funds and to hire the skilled workers have been offered to explain the harmful impact of Brexit uncertainty on UK share sectors.
    Keywords: Brexit,Uncertainty,UK stock market,Sectoral-level analysis
    Date: 2018–09–24
  5. By: Dany-Knedlik, Geraldine; Holtemöller, Oliver
    Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the cross-sectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
    Keywords: inflation dynamics,inflation expectations,trend inflation,nonlinear state space model,panel UCSV model,Euro area
    JEL: C32 C33 E31 E5
    Date: 2018
  6. By: Jung, Benjamin; Felbermayr, Gabriel; Gröschl, Jasmin
    Abstract: Since the 1990s,Germany and other European countries have become more open to trade. The period is characterized by the fall of the iron curtain, the surge of China and its accession to the World Trade Organization (WTO), the introduction of the Euro, the creation of the Schengen area, the enlargement of the European Union (EU), and the Global Europe Initiative. Linking the partial trade effects obtained from our sectoral gravity estimations based on the World-Input-Output Database (WIOD) to real income figures from the Penn World Tables, we find that at least one quarter of the welfare gains realized since 1990 are due to trade policy reforms. Feeding a quantitative simulation exercise based on a version of the Melitz (2003) model with multiple countries and sectors and input-output linkages with the trade costs effects implied by our gravity estimations, we find that Germany’s real per capita income would drop by 5.3%, if all trade liberalization steps since 1990were fully undone.
    Keywords: NewQuantitative TradeModels,Gravity equation,European Integration,Gains from Trade
    JEL: F12 F15
    Date: 2018
  7. By: Bernard Michael Gilroy (Paderborn University); Alexander Golderbein (Paderborn University); Christian Peitz (Paderborn University); Nico Stöckmann (Paderborn University)
    Abstract: Central banks implement negative interest rate policies (NIRP) to incentivize economic subjects to spend and invest money for long term economic growth. Although nominal negative interest rates can not be effectively explained by economic theory, when inflation is included there are currently real negative interest rates in almost all industrial nations. We investigate the difference in banks' performances regarding their core business composition in the short run after zero interest rate policy is announced first. Assigning European banks in the interval from a pure commercial bank to an investment bank leads to the observed heterogeneity within the industry.
    Keywords: Monetary Policy, Bank Profitability, Globalisation, Financial Crisis
    JEL: E52 G21
    Date: 2018–06
  8. By: Döpke, Jörg; Waldhof, Gabi; Fritsche, Ulrich
    Abstract: We report results of a survey among active forecasters of the German business cycle. Using data for 82 respondents from 37 different institutions, we investigate what models and theories forecasters subscribe to and find that they are pronounced conservative in the sense, that they overwhelmingly rely on methods and theories that have been well-established for a long time, while more recent approaches are relatively unimportant for the practice of business cycle forecasting. DSGE models are mostly used in public institutions. In line with findings in the literature there are tendencies of \leaning towards consensus" (especially for public institutions) and \sticky adjustment of forecasts" with regard to new information. We find little evidence that the behaviour of forecasters has changed fundamentally since the Great Recession but there are signs that forecast errors are evaluated more carefully. Also, a stable relationship between preferred theories and methods and forecast accuracy cannot be established.
    Keywords: Forecast error evaluation,questionnaire,survey,business cycle forecast,professional forecaster
    JEL: E32 E37 C83
    Date: 2018
  9. By: Schelkle, Waltraud
    Abstract: The euro is a unique experiment in monetary history: a group of rather different countries adopted voluntarily a common currency, and the supranational central bank is deliberately separated from national fiscal institutions. Every member state had good reasons to take the risk of joining this experiment of a monetary pool of diverse countries. However, the experiment has so far been rather disappointing. A political-economic paradox can explain why the member states could agree only on a dangerously limited form of fiscal risk sharing. These limitations materialised in the recent financial and euro area crisis, in which the rescue of insolvent banks remained a task for each member state even though financial market integration had contributed to making domestic banking systems too big for most of them. But the elements of insurance that have been institutionalised in the monetary union also came to the fore in the crisis: notably the cross-border payments system TARGET sustained the euro area as a trade and payments area. The banking union has made risk sharing in the common currency area more robust. But the risk of fiscal overstretch is still real and calls for further reforms.
    JEL: J1
    Date: 2018–09–11
  10. By: António Afonso; Mina Kazemi
    Abstract: We study the sovereign bond market co-movements and spillovers within 10 EMU countries, the so-called "periphery" and "core" countries, during the period 1999:01 to 2016:07. Implementing Generalized Methods for Moments (GMM) within a panel setting and bivariate VAR analysis, we find that an increase in the lagged spreads of Italian and Austrian bonds negatively affect the spreads of the whole sample while in the increase in the Irish, Portuguese, Belgian and French lagged yields increased the overall spreads. In the VAR analysis we find that spillover effects within the sample are mostly positive.
    Keywords: sovereign yields spreads, spillovers, euro area, panel data
    JEL: C23 E52 G10
    Date: 2018–10
  11. By: de Bondt, Gable J.; Hahn, Elke; Zekaite, Zivile
    Abstract: This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators for euro area headline and core inflation with an aim to provide early signals about turning points in the respective inflation cycle. The series included in the two composite leading indicators are carefully selected from around 160 candidate leading series using a general-to-specific selection process. The headline ALICE includes nine leading series and has a lead time of 3 months while the core ALICE consists of seven series and leads the reference cycle by 4 months. The lead times of the indicators increase to 5 and 9 months, respectively, based on a subset of the selected leading series with longer leading properties. Both indicators identify main turning points in the inflation cycle ex post and perform well in a simulated real-time exercise over the period from 2010 to the beginning of 2018. They also have performed well in forecasting the direction of inflation. In terms of the quantitative forecast accurracy, the headline ALICE has on average performed broadly similarly to the Euro Zone Barometer survey, slightly worse than the Eurosystem/ECB Staff macroeconomic projections and better than the Random Walk model, albeit this is not the case for the core ALICE. JEL Classification: C32, C52, C53, E31, E37
    Keywords: band pass filter, euro area inflation, forecasting, leading indicators, trend-cycle decomposition
    Date: 2018–09
  12. By: Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
    Abstract: We provide evidence that liquidity premia on assets that are more relevant for private agents’ intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets’ differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account. JEL Classification: E32, E42, E52
    Keywords: forward guidance, liquidity premium, unconventional monetary policy
    Date: 2018–10
  13. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the exchange rate pass-through (ERPT) into euro area (EA) inflation by estimating an open economy New Keynesian model with Bayesian methods. In the model ERPT is incomplete because of local currency pricing and distribution services, with the latter allowing to distinguish between ERPT at the border and ERPT at the consumer level. Our main results are the following ones. First, ERPT into EA prices is, in general, high. Second, it is particularly high in correspondence of exchange rate and monetary policy shocks. Third, the EA monetary stance is relevant for ERPT; in particular, ERPT is higher if the stance is accommodative in correspondence of expansionary demand shocks.
    Keywords: exchange rate, import prices, pass-through, monetary policy, euro area.
    JEL: C11 E40 E47 E52 F41
    Date: 2018–09
  14. By: Stylianos Sakkas (European Commission - JRC)
    Abstract: We evaluate the macroeconomic impacts of the European Social Fund (ESF) across the EU at both the national and the regional level. To this end, we use the RHOMOLO dynamic spatial Computable General Equilibrium model developed by the JRC for territorial impact assessment. We find out that the contribution of ESF funds is important for speeding up the economic recovery taking place in most European economies, with the ESF generating economic benefits which are higher than its costs by 2030. However, GDP and employment growth are not the main objectives of the policy. Given the wage benefits and productivity enhancing effects associated with the ESF, its distributional effects are also of interest.
    Keywords: region, growth, European Social Fund, labour market, Cohesion Policy, RHOMOLO
    Date: 2018–10
  15. By: Antonia Lòpez-Villavicencio (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, GATE - Health System Analysis Laboratory - Université de Lyon); Luis Reyes Ortiz (AFD - Agence française de développement)
    Abstract: We empirically investigate the link between economic globalisation and unemployment for a sample of 20 OECD countries over the 1981-2013 period. Controlling for the usual determinants of unemployment, our results show that unemployment is related in a complex way to global economic factors. Specifically , we show that outflows of foreign direct investment and restrictions reduce the unemployment rate, whereas capital account openness raises it. We also find that the standard trade openness measure does not explain unemployment in advanced economies. Finally, the increase in the share of China's imports is not to be blamed for slack in Western labour markets. JEL Classification: E24, F62, C33.
    Keywords: Unemployment,Macroeconomic Impacts of Globalisation,Panel Data Models
    Date: 2018–10–14
  16. By: Will Abel (Bank of England); Silvana Tenreyro (Bank of England; Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE)); Gregory Thwaites (Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE))
    Abstract: We study the evolution and effects of monopsony power in the UK private sector labour market from 1998 to 2017. Using linked employee-firm micro-data, we find that: (1) Measures of monopsony have been relatively stable across the time period examined - rising prior to the crisis, before subsequently falling again. (2) There is substantial cross-sectional variation in monopsony at the industry level. (3) Higher levels of labour market concentration are associated with lower pay amongst workers not covered by a collective bargaining agreement. (4) For workers covered by a collective bargaining agreement, the association between labour market concentration and pay is greatly reduced and in most cases disappears. (5) The link between productivity and wage levels is weaker when labour markets are more concentrated.
    Date: 2018–10
  17. By: Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
    Abstract: We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. JEL Classification: G21, E43, E44
    Keywords: Banking, Hedging, Interest Rate Risk, Risk Management
    Date: 2018–09
  18. By: Matthes, Jürgen; Voigtländer, Michael
    Abstract: In the political declaration of the Withdrawal Agreement the EU should leave the door open for a free trade area for goods that has been suggested by the UK's Chequers proposals. The EU would profit from such an arrangement due to its comparative advantage in goods. However, in order to achieve the EU's main objective to avoid bandwagon effects, such a trade agreement must not be depicted as a favourable deal for the UK. The narrative of the four freedoms is not indispensable to prevent bandwagon effects. A narrow interpretation can be even counterproductive, if the EU continues to regard a lesser degree of service trade integration (as suggested by the UK) as a key stumbling block for a free trade area for goods. On closer inspection, less service trade integration is not a real problem, because it would not lead to relevant competitive distortions as feared by the EU, as other areas like labour costs and social contributions are more relevant cost factors which are not (and should not) be harmonised in the EU. Moreover, the UK proposes to agree to binding rules to prevent distortions of a level playing field in terms of environmental regulations, state aid and competition policy. [...]
    JEL: F1 F2 O52
    Date: 2018
  19. By: Belke, Ansgar; Beckmann, Joscha; Dubova, Irina
    Abstract: Inflation expectations play a crucial role for monetary policy transmission, having become even more important since the emergence of unconventional monetary policy. Based on survey data provided by Consensus Economics, we assess determinants of professional inflation expectations for the G7 economies. We emphasize the role of international spillovers in inflation expectations stemming from monetary policy decisions in the US. We also consider several possible determinants, such as changes in the path of monetary policy, oil price shocks and uncertainty measures. Based on a Bayesian VAR, we find significant evidence for international spillovers stemming from expectations about US monetary policy based on impulse-response functions and forecast error decompositions. We also provide similar evidence on spillovers from the dispersion across inflation forecasts.
    Keywords: Bayesian VAR,expectations,inflation,survey data,updating
    JEL: C22 E31 E52
    Date: 2018

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