nep-eec New Economics Papers
on European Economics
Issue of 2018‒11‒26
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Impact of the ECB’s Quantitative Easing Policy on Capital Flows in the CESEE Region By Anita Angelovska–Bezhoska; Ana Mitreska; Sultanija Bojcheva-Terzijan
  2. Ten years in Economic and Monetary Union: Malta’s experience By Rita Schembri
  3. A Dynamic Hierarchical Cluster Analysis of Economic Performance and Perceptions of the Euro across EU Countries By Emília Zimková; Vlastimil Farka?ovský; ?ubomir Pinter; Jaros?aw Szostak; Krzysztof Koj
  4. 25 Years Single Market: Which Trade and Growth Effects? By Fritz Breuss
  5. Spatial Approach to Heterogeneity of Inflation Expectations in the Euro Area By Karolina Tura-Gawron; Magdalena Szyszko
  6. Impact of the Brexit vote announcement on long-run market performance By Wael Bousselmi; Patrick Sentis; Marc Willinger
  7. Life below zero: Bank lending under negative policy rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  8. Institutions and Political Party Systems: The Euro Case By Jesus Fernandez-Villaverde; Tano Santos
  9. Finland’s Growth Performance – The Lost Decade and the Prospects in the Near Term By Kaitila, Ville; Kauhanen, Antti; Kuusi, Tero; Lehmus, Markku; Maliranta, Mika; Vihriälä, Vesa
  10. Sources of Inequality in Italy By Roberto Iacono; Marco Ranaldi
  11. Dealer behaviour in the Euro money market during times of crisis By Fecht, Falko; Reitz, Stefan
  12. The third pillar of the Investment Plan for Europe: An impact assessment using the RHOMOLO model By Martin Christensen; Andrea Conte; Filippo Di Pietro; Patrizio Lecca; Giovanni Mandras; Simone Salotti
  13. Future European Alliance - Europe as a Flexible Democracy By Bruno S. Frey; Armin Steuernagel; Jonas Friedrich
  14. The Subminimum Wage Reform in Greece and the Labour-Labour Substitution Hypothesis By Theano Kakoulidou; Panagiotis Konstantinou; Thomas Moutos
  15. Early Warning Indicator of financial crises for V4 Countries By Michal Mares; Martin Slany
  16. Looking for the missing rich: Tracing the top tail of the wealth distribution By Stefan Bach; Andreas Thiemann; Aline Zucco
  17. Home Ownership and Monetary Policy Transmission By Koeniger, Winfried; Ramelet, Marc-Antoine

  1. By: Anita Angelovska–Bezhoska (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Sultanija Bojcheva-Terzijan (National Bank of Republic of Macedonia)
    Abstract: This paper attempts to empirically assess the impact of the ECB’s quantitative easing policy on capital flows in the countries of the Central and South Eastern region. Given the tight trade and financial linkages of the region with the euro area, one should expect that the buoyant liquidity provided by the ECB might affect the size of the capital inflows. We test this hypothesis by employing panel estimation on a sample of 14 countries CESEE countries for the 2003-2015 period. Contrary to the expected outcome, the results reveal either negative or insignificant impact of the change in the ECB balance sheet on the different types of capital inflows. The results suggest that the magnitude of the crisis, to which the ECB responded to was immense, hence precluding any significant impact of the monetary easing on capital flows in the region. The inclusion of a dummy in the model, to control for the 2008 crisis confirms the findings from the first specification and also does not change the finding on the ECB quantitative easing impact on the capital flows. The impact of the crisis dummy on capital flows is negative and it holds for almost all types of capital inflows, except for the government debt flows, which is consistent with the countercyclical fiscal policies and rising public debt after the crisis.
    Keywords: quantitative easing polices, ECB, capital flows, CESEE countries, panel estimates, mean group estimator
    JEL: E43 F21 C33
    Date: 2018
  2. By: Rita Schembri
    Abstract: This note compares Malta’s economic performance after it adopted the euro in 2008 with developments in earlier years. It also examines how the Maltese economy’s performance in relation to the euro area changed over time, with reference to selected macroeconomic indicators. The note documents how Malta transitioned from an average, or below-average performer, to one of the best performers in the euro area in economic terms. It also tries to draw some lessons based on Malta’s first ten years as a euro area Member State. It concludes that in Malta's case, participation in Economic and Monetary Union has been an enabling factor for economic growth. However, the absence of major financial and fiscal shocks that characterised several other countries in the euro area, as well as structural reforms aimed at enhancing the economy's efficiency and resilience to shocks through diversification were also important.
    JEL: F42 F43
  3. By: Emília Zimková (Matej Bel University in Banská Bystrica, Faculty of Economics); Vlastimil Farka?ovský (Matej Bel University in Banská Bystrica, Faculty of Economics); ?ubomir Pinter (Matej Bel University in Banská Bystrica, Faculty of Economics); Jaros?aw Szostak (WSB University in Chorzow); Krzysztof Koj (WSB University in Chorzow)
    Abstract: One of the crucial benefits of EU membership, inscribed in Art. 3(3) of the Treaty on the European Union, should be economic and social cohesion. Ample empirical studies have examined EU countries? performance in terms of nominal convergence, real convergence, and convergence of business and financial cycles. Twenty years after the inception of the Economic and Monetary Union, economic cohesion clearly is not a reality, while widening real income gaps threaten social cohesion, too. The paper aims to highlight the heterogeneity and dynamics of changes in economic performance and perceptions of the euro across Europe ? two factors arguably having a tremendous impact on the success of the European project. To this end, series of data spanning 2008 through 2017 were explored using hierarchical cluster analysis.
    Keywords: Economic and Monetary Union, economic performance, convergence criteria, euro adoption, euro perception, dynamic hierarchical cluster analysis
    JEL: E52 E62 E50
    Date: 2018–10
  4. By: Fritz Breuss (WIFO)
    Abstract: The EU Single Market and the Maastricht Treaty are now aged 25. In this short history many events marked the way: the creation of EMU in 1999, the introduction of the euro in 2002, and the great EU enlargement starting in 2004. And lastly – for the first time – with the Brexit a reverse of the process of European integration takes place. The recession of 2009 and the Euro crisis in 2010 led to a setback in the economic development in the EU. A quarter of a century invites to look back about the achievements. How much trade and economic growth could be created by the Single Market plus euro plus EU enlargement? These questions are treated here with the help of a consistent integration model. Embedded into an endogenous growth model approach growth and trade effects for EU and EFTA countries are estimated. It turns out that (taking also into account GATT liberalisation) the European integration added to per-capita GDP 0.5 percentage point to EU 28 countries but only 0.2 percentage point to EFTA countries. Trade openness increased by 0.9 percentage point of GDP in EU 28 and by 0.3 percentage point in EFTA countries.
    Keywords: European Integration, Single Market, Maastricht Treaty, Model simulations
    Date: 2018–11–15
  5. By: Karolina Tura-Gawron (Gdansk University of Technology); Magdalena Szyszko (WSB University in Poznan)
    Abstract: In this article, we examine the spatial heterogeneities in inflation expectations of the euro area consumers. We expect to find them heterogeneous in our research period of 2001-2016. Contrary to standard examination of heterogeneity, a spatial correlation analysis is applied by referring to global and local correlation measures. It is performed with the economic distance-based weights (the difference in HICP rates). Application of spatial analysis is the main contribution of our examination. Standard examinations ignore spatial relations and might be misleading. Our findings suggest that expectations are heterogeneous once the differences of inflation rates represent economic distance between the countries that we cover by our examination.
    Keywords: inflation expectations, expectations heterogeneity, euro area, spatial analysis
    JEL: E52 E61 C31
    Date: 2018–10
  6. By: Wael Bousselmi; Patrick Sentis; Marc Willinger
    Abstract: We examine how the Brexit announcement influenced the long-run market performance of British and European listed firms. Using daily data and a sample composed of 3,015 European listed firms (805 UK and 2,210 non-UK), we find that, over a 12-month horizon, the Brexit announcement negatively affected the long-run market performance of UK firms (regardless of their business activities) and European non-British (non-UK hereafter) firms that conduct most of their business activities within the British area. We also provide evidence that, after the Brexit announcement, analysts’ earnings forecasts and the realized accounting decreased and the return volatility increased for UK firms.
    Keywords: Brexit, Macroeconomic news, Financial market, Buy-and-hold, Event study.
    Date: 2018–11
  7. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.
    Keywords: bank balance-sheet channel; bank risk-taking channel; deposits; Negative Interest Rates; zero lower bound
    JEL: E44 E52 E58 G20 G21
    Date: 2018–09
  8. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Tano Santos (Department of Economics, Columbia University)
    Abstract: This paper argues that institutions and political party systems are simultaneously determined. A large change to the institutional framework, such as the creation of the euro by a group of European countries, will realign -after a transition period- the party system as well. The new political landscape may not be compatible with the institutions that triggered it. To illustrate this point, we study the case of the euro and how the party system has evolved in Southern and Northern European countries in response to it.
    Keywords: Federalism, Political Institutions, Party Systems, Euro
    JEL: D72 F30 F40
    Date: 2017–07–03
  9. By: Kaitila, Ville; Kauhanen, Antti; Kuusi, Tero; Lehmus, Markku; Maliranta, Mika; Vihriälä, Vesa
    Abstract: Abstract In the report we analyse the reasons for the weakness of Finland’s economic performance over the past decade and assess the growth prospects in the coming 5 years. The weakness of Finland’s performance relative to comparative EU-countries since 2009 can largely be explained by the collapse of Nokia’s production and the deterioration of cost competitiveness. The recovery in turn stems from a stronger export market growth, the fading away of the negative Nokia shock, and the improvement of cost competitiveness. Of the rise of employment by some 100 000 jobs since 2015 about half can be explained by a number of policy measures to increase labour supply and the so-called competitiveness pact. Based on a realistic assumption on productivity growth, we estimate that Finland could achieve an annual growth rate of about 2 per cent in the coming 5 years. This requires, nevertheless, that the employment rate increases by 2023 to the level reached by comparative countries. Although such a change would not be greater than what is taking place during the current government period, ambitious reforms are needed to achieve this.
    Keywords: Growth, Employment, Productivity, Labour supply, Competitiveness, Finland’s economy
    JEL: E37 E61 E62 F10 J11 J20 O11
    Date: 2018–11–12
  10. By: Roberto Iacono (Norwegian University of Science and Technology, Norway); Marco Ranaldi (PSE and University Paris 1 Panthéon-Sorbonne, France)
    Abstract: In this article, we study the link between the functional and personal distribution of income, focusing on the case of Italy between 1989 and 2016. To this end, we rely on the novel concept of income composition inequality. Income composition inequality focuses on how unequally the composition of income is distributed across the population. The higher the overall degree of income composition inequality is, the stronger the link between the functional and personal distribution of income. We show that the strength of this link decreased steadily in Italy over the period considered. This result is robust to the use of different definitions of capital and labor and different estimation techniques of the degree of income composition inequality. The implications of this result are twofold. First, fluctuations in the total factor shares of income are having an increasingly weaker impact on income inequality in Italy. Second, Italy is moving towards becoming a multiple sources of income society. Finally, we conceptualize a simple rule of thumb for policy makers seeking to reduce income inequality in the long run: This rule relates fluctuations in the total factor shares and the level of income composition inequality to the specific income source to be redistributed.
    Keywords: Income composition inequality, functional and personal income distribution, Italy.
    JEL: C43 E25 H24
    Date: 2018–10
  11. By: Fecht, Falko; Reitz, Stefan
    Abstract: This article shows how the recent money market disruptions with elevated counterparty risks and uncertainty about the fundamental value of liquidity influenced the trading behaviour of a key dealer in the Euro money market. The complete trading record in the unsecured segment of the money market for 2007 and 2008 is used to estimate a stylized pricing model, which explicitly accounts for the over-the-counter structure. The empirical results suggest that the market maker learns from order flow, but this information aggregation was increasingly hampered as the crisis unfolded.
    Keywords: Euro money market,financial crisis,market microstructure,pricing behaviour
    JEL: E43 G15 C32
    Date: 2018
  12. By: Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Filippo Di Pietro (European Commission - JRC); Patrizio Lecca (European Commission - JRC); Giovanni Mandras (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: We evaluate the macroeconomic impact of the legislative proposals contained in the third pillar of the Investment Plan for Europe using the RHOMOLO modelling framework. In particular, we study a number of proposals related to the Capital Markets Union, the Single Market Strategy, the Digital Single Market, and the Energy Union. The likely economic effects of the removal of cross-country barriers to investment related to these four initiatives are positive and quantified to be on average equal to an increase of 1.5% of EU GDP by 2030. Such an impact would also entail the creation of about 1 million jobs.
    Keywords: rhomolo, region, growth, investment plan for europe, third pillar, capital markets union, single market strategy, energy union, digital single market, modelling
    JEL: C54 C68 E62
    Date: 2018–11
  13. By: Bruno S. Frey; Armin Steuernagel; Jonas Friedrich
    Abstract: A reasonable future for Europe can only be achieved if two essential elements are fulfilled: Firstly, newly established institutions must be democratic and have strong support from citizens rather than from national governments. Secondly, the large number of different ethnic, cultural, religious, and regional units existing on the European continent must be able to maintain their identity. This diversity must be institutionally supported rather than be undermined by standardization and centralization. We suggest political institutions, which are formed to meet these goals, following the example of Functional, Overlapping, Competing Jurisdictions (FOCJ). If these two goals are adequately reached, a future alliance raises the identification with the European project, and induces citizens to exhibit civic virtue in strengthening these goals.
    Keywords: europe, flexible institutions, identity, diversity, FOCJ, European Union
    JEL: H10 H40 K33 P40 P48 R10
    Date: 2018
  14. By: Theano Kakoulidou; Panagiotis Konstantinou; Thomas Moutos
    Abstract: The paper examines the effects of the age-differentiated decreases in the minimum wage which Greece implemented in 2012, and which involved the introduction of a subminimum wage as a result of the reduction of the minimum wage by 22% for workers aged 25 and above, and by 32% for those aged less than 25. Using data from the Greek Labor Force Survey, we estimate probit models and find that after the reform there was no statistically significant change in the differential employment probability advantage for private sector employees aged 25-27 over those aged 22-24. We also find that the probability of labour force participation for individuals in the 25-27 group becomes significantly higher (relative to the 22-24 group), which is reflected in a (statistically) significant improvement in the relative job finding rate for non-agricultural, private-sector employees of this group after the reform. Moreover, the reform had no significant differential impact on employment terminations; i.e. it had no differential impact on either dismissals or quits. These findings remain unaltered to a series of robustness checks.
    Keywords: minimum wages, sub-minimum reform, employment, Greece
    JEL: J21 J23 J30
    Date: 2018
  15. By: Michal Mares (University of Economics, Prague); Martin Slany (University of Economics, Prague)
    Abstract: This paper represents an early warning indicator of financial crises applied to the data of the Czech Republic, Poland, Hungary and Slovakia (V4 counties) between 2005 and 2018. Based on the previous research, 16 indicators were selected to build up the composite indicator of cyclical components ? so. Composite Index of Financial Instability (CIFI), and discussed its development. The relevance of the presented indicator, especially in the context of the Euro-American financial crisis of 2008-2009, is demonstrated in both graphical and econometric analysis using panel logistic regression. The conclusion implies that all V4 countries had experienced a high instability in connection with the global financial crisis 2008/2009 and implies different developments in financial conditions in recent years. The output of econometric model confirms positive relation between the value of CIFI and probability of financial crises occurrence. An increase in the CIFI per unit indicates an increase in probability of occurrence crisis approximately by 7 %. In spite of all its limitations, the usefulness of the composite index in the context of economic policymaking is proven by the analysis.
    Keywords: financial crises, early warning indicator, composite index, Visegrad countries,panel regression
    JEL: C53 E47 G01
    Date: 2018–10
  16. By: Stefan Bach (German Institut for Economic Research (DIW Berlin)); Andreas Thiemann (European Commission – JRC); Aline Zucco (German Institut for Economic Research (DIW Berlin))
    Abstract: We analyze the top tail of the wealth distribution in Germany, France, and Spain based on the first and second wave of the Household Finance and Consumption Survey (HFCS). Since top wealth is likely to be underrepresented in household surveys, we integrate big fortunes from rich lists, estimate a Pareto distribution, and impute the missing rich. In addition to the Forbes list, we rely on national rich lists since they represent a broader base for the big fortunes in those countries. As a result, the top percentile share of household wealth in Germany jumps up from 24 percent to 31 percent in the first and from 24 to 33 percent in the second wave after top wealth imputation. For France and Spain, we find only a small effect of the imputation since rich households are better captured in the survey.
    Keywords: Wealth distribution, missing rich, Pareto distribution, HFCS
    JEL: D31 C46 C81
    Date: 2018–11
  17. By: Koeniger, Winfried; Ramelet, Marc-Antoine
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates– compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018–11

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