nep-eec New Economics Papers
on European Economics
Issue of 2018‒11‒05
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Business investment in EU countries By Bańbura, Marta; Albani, Maria; Ambrocio, Gene; Bursian, Dirk; Buss, Ginters; de Winter, Jasper; Gavura, Miroslav; Giordano, Claire; Júlio, Paulo; Le Roux, Julien; Lozej, Matija; Malthe-Thagaard, Sune; Maria, José R.; Martínez Carrascal, Carmen; Meinen, Philipp; Michail, Nektarios; Papageorgiou, Dimitris; Pool, Sebastian; Ravnik, Rafael; San Juan del Peso, Lucio; Tóth, Máté; Zevi, Giordano
  2. The Tariff Impact of Hard Brexit: Taking back Control Comes at a Price By Legge, Stefan; Lukaszuk, Piotr
  3. A euro area macroeconomic stabilisation function: assessing options in view of their redistribution and stabilisation properties By Koester, Gerrit; Sondermann, David
  4. Effects of Brexit on Corporate Yield Spreads: Evidence from UK and Eurozone Corporate Bond Markets By Arthur Korus; Samir Kadiric
  5. Exploring the implications of di erent loan-to-value macroprudential policy designs By Rita Basto; Sandra Gomes; Diana Lima
  6. Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area By Andrade, Philippe; Ferroni, Filippo
  7. Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme By Lemke, Wolfgang; Werner, Thomas
  8. The Effect of ECB Policy Announcements on Sovereign Yields: A Return to Normal Transmission? By Goodhead, Robert
  9. Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area By Jocelyn Maillard
  10. How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area By Lenza, Michele; Slacalek, Jiri
  11. Business Cycle Synchronisation in a Currency Union: Taking Stock of the Evidence By Fidrmuc, Jarko; Campos, Nauro F.; Korhonen, Iikka
  12. Uncertain kingdom: nowcasting GDP and its revisions By Anesti, Nikoleta; Galvao, Ana Beatriz; Miranda-Agrippino, Silvia
  13. Speculative Eurozone Attacks and Departure Strategies By Homburg, Stefan
  15. Economic integration and bilateral FDI stocks: the impacts of NAFTA and the EU By Barrell, Ray; Nahhas, Abdulkader
  16. Identifying Asymmetric Effects of Labor Market Reforms By Weber, Enzo; Gehrke, Britta
  17. Understanding Free Trade Attitudes: Evidence from Europe By Braml, Martin; Felbermayr, Gabriel
  18. News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy By Paul Rudel; Peter Tillmann
  19. Switzerland's Trade Policy: End of the FTA Road, Switch to the BTB Lane? By Legge, Stefan; Lukaszuk, Piotr
  20. A multi†country analysis of austerity policies in the European Union By Oscar Bajo-Rubio; Antonio G. Gómez-Plana

  1. By: Bańbura, Marta; Albani, Maria; Ambrocio, Gene; Bursian, Dirk; Buss, Ginters; de Winter, Jasper; Gavura, Miroslav; Giordano, Claire; Júlio, Paulo; Le Roux, Julien; Lozej, Matija; Malthe-Thagaard, Sune; Maria, José R.; Martínez Carrascal, Carmen; Meinen, Philipp; Michail, Nektarios; Papageorgiou, Dimitris; Pool, Sebastian; Ravnik, Rafael; San Juan del Peso, Lucio; Tóth, Máté; Zevi, Giordano
    Abstract: The article analyses recent developments in business investment for a large group of EU countries, using a broad set of analytical tools and data sources. We find that the assessment of whether or not investment is currently low varies across benchmarks and countries. At the euro area level and for most countries, the level of business investment is broadly in line with the level of overall activity. However rates of capital stock growth have slowed down since the crisis. The main cyclical determinants of investment developments in the euro area include foreign and domestic demand, uncertainty and financial conditions. Uncertainty seems to have played a negative role during the financial and sovereign debt crises; however, given its low levels more recently, it has not acted as a drag on business investment overall during the recovery. Credit constraints appear to have hindered investment during the twin crises, especially in stressed countries. Aside from cyclical developments, important secular factors – relating to demographics, the changing nature and location of production, and the business environment – have influenced investment. Another factor that may have amplified the decline in private investment, particularly in countries that were hit hardest by the sovereign debt crisis, is the low level of public investment. This is because when public investment enhances the productivity of the private sector, there may be positive spillovers from the former to the latter, including across countries. Finally, intra-sector capital misallocation, measured as the within-sector dispersion across firms in the marginal revenue product of capital, has been increasing in Europe since 2002, which may in turn have exerted a significant drag on total factor productivity dynamics, and hence on aggregate output growth. JEL Classification: E32, E52, E62, D24, D61
    Keywords: business investment, capital misallocation, monetary policy, uncertainty
    Date: 2018–10
  2. By: Legge, Stefan; Lukaszuk, Piotr
    Abstract: In the so-called Brexit Referendum of June 2016, the British people voted to leave the European Union. With no deal in sight yet, a plausible scenario is that the United Kingdom will start trading with all countries on the basis of WTO rules from April 2019 onward. This would imply that all UK imports and exports will be subject to most-favored-nation (MFN) duties. In the present paper, we examine the tariff impact of a hard Brexit and show that neither better trade agreements with non-European countries nor joining EFTA can compensate for worsened access to the EU market. Assuming that the UK will introduce tariffs according to the currently applied MFN schedule of the European Union, our findings reveal that both British exports and imports would face substantial tariffs. In total, we estimate a quadrupling of duties on UK imports to $21.1 billion and $13.9 billion on exports. Assuming imports from the EU and countries that currently have an FTA with the EU will not change, British Customs would collect an additional $300 million per week after a hard Brexit.
    Keywords: Brexit, FTA, Tariffs, Trade Policy, United Kingdom
    JEL: F14
    Date: 2018–10
  3. By: Koester, Gerrit; Sondermann, David
    Abstract: A macroeconomic stabilisation function for the euro area - as envisaged in the Five Presidents’ Report - plays a central role in the debate on deepening Economic and Monetary Union (EMU). We evaluate a broad range of options, their impact on economic growth, macroeconomic stabilisation and synchronisation of the euro area business cycle, and review how they could be designed so they do not undermine incentives for welfare-enhancing national economic policies. A common macroeconomic stabilisation function, e.g. in the form of a European Unemployment Insurance (EUI), could in theory help stabilise the business cycle in the euro area, especially in some participating Member States. Yet, simulating the effects of such a function for 2002-2014 suggests that its stabilisation properties would have been relatively limited. At the same time, design options with meaningful safeguards and relatively low financing requirements would have been most efficient when comparing the degree of stabilisation with the size of the funds distributed among countries. Finally, we discuss some design elements of a scheme whose aim is to support the transition process towards more resilient economic structures in the euro area as envisaged in the Five Presidents’ Report. JEL Classification: J65, H53, F55
    Keywords: economic union, EMU, macroeconomic stabilisation, unemployment insurance
    Date: 2018–10
  4. By: Arthur Korus (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Samir Kadiric (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: Using event-study techniques we investigate the impact of Brexit-related events on the corporate bond yield spreads in the United Kingdom and euro area, respectively. We want to find out whether Brexit-related news, including the Brexit referendum itself, had an impact on the risk conditions in those two corporate bond markets. Our estimation results indicate that the announcement of the referendum result is associated with increasing credit spreads in the UK and EA. However, only the actual announcement of the UK referendum result itself had an influence on the credit spreads. Furthermore, we distinguish between the financial and the non-financial economic sectors in order to analyze more specific sector-related effects of the referendum event. Our estimation results suggest that UK credit spreads were more strongly influenced by the announcement of the results of the Brexit referendum than credit bond spreads in the euro area were. Finally, we split our sample into pre-referendum and post-referendum periods to consider the potential changing evaluation of the determinants of corporate bond spreads due to altering risk pricing triggered by the Brexit referendum result. We find that the effect of credit default risk is far stronger and plays a significant role in the post-referendum period in UK and EA, respectively.
    Keywords: corporate bond yield spreads, credit risk, Brexit, event-study
    JEL: C32 G12 G14 G32
    Date: 2018–09
  5. By: Rita Basto (Banco de Portugal); Sandra Gomes (Banco de Portugal); Diana Lima (Banco de Portugal)
    Abstract: This paper evaluates the macroeconomic effects of macroprudential policy measures consisting of changes in loan-to-value ratios in the euro area. The analysis is carried out within a fully structural, multi-country model, that prominently includes nancial frictions and a banking sector. Our main findings suggest that a permanent LTV tightening in a small euro area economy leads to a long-run decline in lending to the private sector. The short-run impact depends crucially on the policy design, being less pronounced when the measure is phased-in. This is consistent with policy goals of curbing credit growth but avoiding an abrupt immediate contraction in lending. A policy measure introduced at the euro area level implies larger long-run e ects but the short-run recessionary impact is attenuated by the monetary policy response.
    Keywords: Macroprudential policy; loan-to-value ratio; financial frictions
    JEL: E58 E61 F42
    Date: 2018–10
  6. By: Andrade, Philippe (Banque de France); Ferroni, Filippo (Federal Reserve Bank of Chicago)
    Abstract: We use financial intraday data to identify monetary policy surprises in the euro area. We find that monetary policy statements and press conferences after European Central Bank (ECB) Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of the information revealed in a narrow window around these statements and press conferences evolved over time. Until 2013, unexpected variations in future interest rates were positively correlated with the changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use conditions on the joint reaction of expected interest rates and inflation rates to disentangle the two types of monetary policy shocks (i.e. the Delphic and Odyssean monetary policy surprise). A surprise that lowers future interest rates does not engineer a boom. A surprise that lowers future interest rates because it signals future accommodation does.
    Keywords: monetary policy; signaling; forward guidance; high frequency data; VAR with instrumented proxy; euro area
    JEL: C10 E32 E52
    Date: 2018–07–26
  7. By: Lemke, Wolfgang; Werner, Thomas
    Abstract: Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB's Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach.
    Keywords: term structure of interest rates,large-scale asset purchases,term
    JEL: E43 E52
    Date: 2018
  8. By: Goodhead, Robert (Central Bank of Ireland)
    Abstract: This letter quanties the eects of ECB policy announcements on sovereign yields by studying movements in forward contracts on meeting days of the Governing Council. The pre-crisis, crisis, and post-crisis periods are studied. The analysis focuses on the cases of Germany, France, Italy and Spain. A breakdown of the transmission of ECB policy to sovereign yields for the Italian and Spanish cases is documented during the crisis period, with transmission to the German and French bonds largely unaected. Transmission for the two stressed economy cases is found to have reverted to that of “normal” times in the post-crisis data.
    Date: 2018–05
  9. By: Jocelyn Maillard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2018
  10. By: Lenza, Michele; Slacalek, Jiri
    Abstract: This paper studies the effects of quantitative easing on income and wealth of individual euro area households. The aggregate effects of quantitative easing are estimated in a multi-country VAR model of the four largest euro area countries, in which key variables affecting household income and wealth are included, such as the unemployment rate, wages, interest rates, house prices and stock prices. The aggregate effects are distributed across the individual households by means of a reduced-form simulation on micro data from the Household Finance and Consumption Survey, capturing the income composition, the portfolio composition and the earnings heterogeneity channels of transmission. We find that the earnings heterogeneity channel plays a key role: quantitative easing compresses the income distribution since many households with lower incomes become employed. In contrast, monetary policy has only negligible effects on wealth inequality. JEL Classification: D14, D31, E44, E52, E58
    Keywords: Great Recession, household heterogeneity, income, inequality, monetary policy, quantitative easing, wealth
    Date: 2018–10
  11. By: Fidrmuc, Jarko; Campos, Nauro F.; Korhonen, Iikka
    Abstract: This paper offers a first systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3,000 business cycles synchronisation coefficients and their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); (3) there is evidence of country-specific publication bias; (4) our differences-in-differences estimates suggest the euro accounted for approximately half of the observed increase in synchronisation.
    Keywords: business cycles synchronisation,optimum currency areas,EMU,euro,meta-analys
    JEL: E32 F42
    Date: 2018
  12. By: Anesti, Nikoleta; Galvao, Ana Beatriz; Miranda-Agrippino, Silvia
    Abstract: We design a new econometric framework to nowcast macroeconomic data subject to revisions, and use it to predict UK GDP growth in real-time. To this aim, we assemble a novel dataset of monthly and quarterly indicators featuring over ten years of real-time data vintages. Successive monthly estimates of GDP growth for the same quarter are treated as correlated observables in a Dynamic Factor Model (DFM) that also includes a large number of mixed-frequency predictors, leading to the release-augmented DFM (RA-DFM). The framework allows for a simple characterisation of the stochastic process for the revisions as a function of the observables, and permits a detailed assessment of the contribution of the data flow in informing (i) forecasts of quarterly GDP growth; (ii) the evolution of forecast uncertainty; and (iii) forecasts of revisions to early released GDP data. By evaluating the real-time performance of the RA-DFM, we find that the model’s predictions have information about the latest GDP releases above and beyond that contained in the statistical office earlier estimates; predictive intervals are well-calibrated; and UK GDP growth real-time estimates are commensurate with professional nowcasters. We also provide evidence that statistical office data on production and labour markets, subject to large publication delays, account for most of the forecastability of the revisions.
    Keywords: nowcasting; data revisions; dynamic factor model
    JEL: C51 C53
    Date: 2018–08–22
  13. By: Homburg, Stefan
    Abstract: This paper shows that the eurozone payment system does not effectively protect member states from speculative attacks. Suspicion of a departure from the common currency induces a terminal outflow of central bank money in weaker member states. TARGET2 cannot inhibit this drain but only protects central bank assets. Evidence presented here suggests that a run on Italy is already on the way. The paper also considers departure strategies of strong and weak member states and the distributive effects of an orderly eurozone dissolution.
    Keywords: Currency speculation; TARGET2; eurozone; Italexit; Dexit; trilemma
    JEL: E52 E58
    Date: 2018–10
  14. By: Aleksandra Parteka (Gdansk University of Technology, Gdansk, Poland); Joanna Wolszczak-Derlacz (Gdansk University of Technology, Gdansk, Poland)
    Abstract: By using very rich individual-level data on workers from 28 European countries, we provide the first so extensive cross-country assessment of wage response to global production links within global value chains (GVCs) in the period 2005–2014. Unlike the other studies, we (i) address the importance of backward links in globally integrated production structures (capturing imports of goods and services required in any stage of the production of the final product); (ii) measure the occupational task profile of workers with new country-specific indices of routinisation; (iii) compare the impact of global production links on wages between workers from Western, Central–Eastern, and Southern Europe employed in manufacturing and non-manufacturing sectors; and (iv) account for direct and indirect dependence on GVC imports from developing and high-income countries. We consider the potential endogeneity problems. Our results suggest that global import intensity of production exhibits negative pressure on wages in Europe. This effect mainly concerns workers from Western Europe employed in manufacturing and is driven by production links with non-high-income countries. Our counterfactual estimates suggest that the effect for all of Europe is small, but the pressure of GVC imports on wages in Western Europe is not economically negligible, in particular when inputs are from less developed countries including China.
    Keywords: wages, global value chains, global import intensity of production, tasks, EU
    JEL: F14 F16 J31
    Date: 2018–10
  15. By: Barrell, Ray; Nahhas, Abdulkader
    Abstract: This paper examines the factors affecting bilateral Foreign Direct Investment (FDI) stocks from 14 high income countries to 31 OECD countries over the period 1995-2015. We specifically emphasise the effect of regional trade agreements such as the European Union (EU) and the North American Free Trade Area (NAFTA) along with membership of the Currency Union. Our empirical analysis applies the generalised method of moments (GMM) estimator to a gravity model of bilateral FDI stocks. The findings imply that EU membership is a significant determinant of FDI even when we condition on the variables that follow from the application of the gravity model. We look at the effects of the North American Free Trade Area on within block FDI and find no similar effect. Our results suggest that European Integration has a large effect on FDI stocks, raising intra Single Market FDI noticeably. We note that the UK’s departure from the Single Market may reduce the stock of intra EU FDI by up to 30 per cent in the long run. In addition, the findings point that the UK has no labour market or competitive environment advantage above the rest of the EU in attracting FDI.
    JEL: C23 F14 F15
    Date: 2018–05–15
  16. By: Weber, Enzo; Gehrke, Britta
    Abstract: This paper proposes a novel approach to identify structural long-term driving forces of the labor market and their state dependent effects. Based on search and matching theory, our empirical model extracts these driving forces within an unobserved components approach. We relate changes in the labor market structures to reforms that enhance the flexibility of the labor market in expansion and recession. Results for Germany and Spain show that labor market reforms have substantially weaker beneficial effects in the short-run when implemented in recessions. From a policy perspective, these results highlight the costs of introducing reforms in recessions.
    Keywords: labor market reforms,search and matching,business cycle asymmetries,Markov switching
    JEL: C32 E02 E32 J08
    Date: 2018
  17. By: Braml, Martin; Felbermayr, Gabriel
    Abstract: Our paper contributes by demonstrating that public opinion on open-market policies is mainly shaped by ideology rather than by rational considerations and economic self-interest. Exploiting data on attitudes towards TTIP, Free Trade, Protectionism, and Globalization from the Eurobarometer, a comprehensive biannual survey across EU citizens, we find that individual preferences towards different trade policies can hardly be explained by variables that typically determine personal advantages of trade liberalization. Nevertheless, rational considerations follow expected patterns but are not overly relevant. Rather, we find trust variables and country-fixed-effects being predominant drivers of individual open-market attitudes. Our data also allow for a spatial analysis at the European NUTS-2 level. Performing a cross-country analysis, we find a causal relation between anti-Americanism and national TTIP approval rates. Macroeconomic performance variables contribute only to a minor extent in shaping regional and national preferences.
    Keywords: International Political Economy,Free Trade Attitudes,TTIP
    JEL: F13 F53
    Date: 2018
  18. By: Paul Rudel (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Monetary policy increasingly relies on steering market expectations about future policy. This paper identifies a monetary policy news shock based on a VAR model. A monetary news shock is equivalent to new information about the Fed's future monetary policy becoming available today. One example of a monetary news shock is a Forward Guidance announcement, where the Fed unveils its prospectively (binding) monetary policy, today. In this paper, we study the spillover effects of news shocks. We estimate the response of the euro area to an expected future policy tightening of the Fed. The U.S. news shock improves sentiment and business cycle expectations in the euro area, which is consistent with the notion of the Fed revealing favorable news by a tightening announcement. We also distinguish the news shock from a conventional U.S. policy surprise and find that they lead to diverging responses in the euro area.
    Keywords: News shock, spillovers, forward guidance, monetary policy, interest rates, expectations
    JEL: E43 E58 F42
    Date: 2018
  19. By: Legge, Stefan; Lukaszuk, Piotr
    Abstract: Not being a member of the European Union, Switzerland has developed a vast network of 30 free trade agreements (FTA) with 40 partner countries, covering more than 80 percent of Swiss foreign trade. We examine this network and document how much Switzerland and its trading partners benefit from existing FTAs. Furthermore, this study analyzes possible gains from signing additional trade agreements as well as the tariff impact of a hard Brexit. The findings reveal that overall tariff reductions are substantial in absolute terms and balanced for Swiss exports and imports. The total amount of duties paid to Swiss Customs as well as foreign customs authorities is reduced by approximately 2 billion CHF annually. We conclude with the observation that there is limited scope for further tariff reductions, suggesting that a new focus on behind-the-border (BTB) measures is recommended.
    Keywords: FTA, Tariffs, Trade Policy, Switzerland
    JEL: F14
    Date: 2018–10
  20. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Antonio G. Gómez-Plana (Universidad Pública de Navarra)
    Abstract: In this paper, we analyse the global effects, i.e., the effects on the world economy, from the austerity policies implemented in the European Union (EU) over the last years. Specifically, we simulate the effects of three alternative policies aimed to get a fall of one percentage point in the EU’s government deficit to GDP ratio, through a decrease in the level of public spending, and increases in consumption and in labour taxes. We examine their effects on the main macroeconomic variables of seven regions of the world economy, i.e., the EU, the US, Japan, China, Asia†Pacific, Latin America and Rest of the World. The empirical methodology makes use of a computable general equilibrium (CGE) model, through an extension of the Global Trade Analysis Project (GTAP) model. The three policy measures led to contractionary effects on the EU’s levels of activity, which were accompanied with changes in income distribution, always detrimental to labour. The effects on the rest of the world, however, were mostly negligible.
    Keywords: Computable general equilibrium, Austerity policies, Global economy, European Union
    JEL: C68 H62 H20 H50
    Date: 2018–03

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