nep-eec New Economics Papers
on European Economics
Issue of 2019‒01‒14
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Growth and European Institutional Reforms By Mariarosaria Comunale; Francesco Paolo Mongelli
  2. The Single Supervisory Mechanism: competitive implications for the banking sectors in the euro area By Iryna Okolelova; Jacob Bikker
  3. The Fall in UK Potential Output due to the Financial Crisis: a Much Bigger Estimate By Crafts, Nicholas Author-workplace-Name: CAGE, University of Warwick
  4. Inequality in EMU: is there a core periphery dualism? By Tatiana Cesaroni; Enrico D'Elia; Roberta De Santis
  5. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  6. Immigration and Public Finances in OECD Countries By Hippolyte D'Albis; Ekrame Boubtane; Dramane Coulibaly
  7. Transmission of sectoral debt shocks in OECD countries: Evidence from the income channel By Georgios Magkonis; Anastasia Theofilakou
  9. How openness to trade rescued the Irish economy By McQuinn, Kieran; Varthalitis, Petros
  10. Research for REGI Committee – Externalities of Cohesion Policy By Alessandro Daraio; Andrea Naldini; Roman Römisch; Gessica Vella; Enrico Wolleb
  11. Global Imbalances with Safe Assets in Eurozone By Hung Ly-Dai
  12. Policy uncertainty and investment in Spain. By Daniel Dejuán; Corinna Ghirelli

  1. By: Mariarosaria Comunale (Bank of Lithuania and European Central Bank); Francesco Paolo Mongelli (European Central Bank and Johann Wolfgang Goethe University of Frankfurt)
    Abstract: Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it? We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration in its main components, we can see a significant positive role for financial and political integration in the long-run. However the first seems to have beneficial effects for the core only while the opposite holds for the political integration which influences positively the periphery.
    Keywords: euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, synchronization
    JEL: C23 E40 F33 F43
    Date: 2019–01–02
  2. By: Iryna Okolelova; Jacob Bikker
    Abstract: This paper investigates the impact of the SSM's launch on the market power of banks in the large euro area economies. We employ the Lerner index and the Boone estimator, non-structural measures that capture different aspects of competition. Using the results of the Lerner index, we find evidence of the significant decrease in market power for the ECB supervised entities in Austria, France, Germany and Spain. In a similar vein, the Boone indicator points toward an increase in competition among significant supervised entities of Austria, France, Germany, Italy and Spain. The evidence on changes for the total banking sector are mixed, whereas no significant effect is found for the banks remaining under national supervision. We do not find any support for significant increases in the market power of banks in Italy or Spain, suggesting that large increases in concentration do not necessarily result in anticompetitive conduct.
    Keywords: Banking; SSM; competition; market structure; concentration; Lerner index; Boone indicator
    JEL: G21 G28 L1
    Date: 2018–12
  3. By: Crafts, Nicholas Author-workplace-Name: CAGE, University of Warwick
    Abstract: Conventional estimates suggest that the 2007-9 financial crisis reduced UK potential output by 3.8 to 7.5 per cent of GDP. This implied a need for fiscal tightening as the structural budget deficit had increased considerably. The austerity that followed led to the rise of UKIP, the EU referendum and the vote for Brexit. Brexit will reduce potential output by somewhere between 3.9 and 8.7 per cent of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is approximately double the conventional estimate.
    Keywords: austerity, Brexit, financial crisis, potential output JEL Classification: F15, G01, H12, O47.
    Date: 2019
  4. By: Tatiana Cesaroni; Enrico D'Elia; Roberta De Santis
    Abstract: Income inequality has had a minor role in the European integration process’ institutional framework. This is particularly unfitting given that reducing disparities has been one of the most explicit and firm goals of the EU, which has consequently devoted an increasing share of its budget to regional policy. This issue has potentially relevant policy implications (as often underlined by the OECD reports) because if the European integration has a role in increasing inequalities within member countries it is harmful for social cohesion. This paper intends to assess inequality determinants in EMU countries and whether the European integration process has been itself among them. It performs an empirical investigation on a panel of 12 EMU member States in the period 1980 and 2015. The contribution of this paper to the existing literature in twofold: first, it focuses on the effects of European integration on inequality in EMU countries over the last 25 years, on which the evidence is still scarce. Second, it tries to disentangle the European integration impact on inequality in core and periphery EMU members countries in order to investigate the so called “core periphery dualism” determinants.
    Keywords: Income inequality, core-periphery dualism, financial integration, trade openness, panel data analysis
    JEL: D63 D31 H23
    Date: 2018–12
  5. By: Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information - Ensai, Ecole Nationale de la Statistique et de l'Analyse de l'Information, CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], ULCO - Université du Littoral Côte d'Opale); Aurélien Eyquem (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); Xiaofei Ma (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], UEVE - Université d'Évry-Val-d'Essonne)
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the periphery. We use the model to investigate the effects of a stylized public asset purchase program at the steady state and during a crisis. We find that it is more effective in stimulating the economy during a crisis, in particular for the periphery.
    Keywords: Recession,Interbank Market,Sovereign Default Risk,Asset Purchases
    Date: 2018
  6. By: Hippolyte D'Albis (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Ekrame Boubtane (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Dramane Coulibaly (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper shows that the macroeconomic and fiscal consequences of international migration are positive for OECD countries, and suggests that international migration produces a demographic dividend by increasing the share of the work- force within the population. The estimation of a structural vector autoregressive model on a panel of 19 OECD countries over the period 1980-2015 reveals that a migration shock increases GDP per capita through a positive effect on both the ratio of working-age to total population and the employment rate. International migration also improves the fiscal balance by reducing the per capita transfers paid by the government and per capita old-age public spending. To rationalize these findings, an original theoretical framework is developed. This framework highlights the roles of both the demographic structure and intergenerational public transfers and shows that migration is beneficial to host economies characterized by aging populations and large public sectors.
    Keywords: Immigration,public finances,overlapping-generation model,panel VAR
    Date: 2018–12–14
  7. By: Georgios Magkonis (University of Portsmouth); Anastasia Theofilakou (Hellenic Ministry of Finance)
    Abstract: We examine the propagation of debt shocks across sectors of the economy for OECD countries. Our focus lies on assessing the importance of the income channel as a main transmission mechanism of such shocks. Employing a Bayesian Panel VAR, we find strong debt contagion effects across sectors, which work through the income channel. Higher non-financial corporate debt drives down household incomes, increasing pressures for household deleveraging. By contrast, an increase in household debt boosts real incomes and domestic demand, and results in higher corporate leverage. Finally, we find that growth effects of sectoral debt shocks are conditional on country idiosyncrasies.
    Keywords: Macroeconomic shocks, sectoral debt, panel BVAR
    JEL: H30 E60 C11
    Date: 2019–01–09
  8. By: Paulo R. Mota (University of Porto – School of Economics and Business and CEF.UP); Abel L. C. Fernandes (University of Porto – School of Economics and Business and NIFIP)
    Abstract: A fundamental aspect of the ECB’s monetary policy is that it aims to pursue price stability “over the medium term.” However, the ECB has not defined the medium term with reference to a predetermined horizon, retaining some flexibility with regard to the exact time frame. The objective of this paper is to shed some light on how the horizon of price stability is being achieved in practice, in a context where the ECB faces convex and non-convex costs of adjusting the target interest rate. We assume that ECB’s monetary policy follows an average flexible inflation target framework, and we analyse the R2 of an equation where the target interest rate is specified as a function of the j-period window over which average inflation rate is measured. Target interest rate inertia is incorporate through a switching interest rate equation based on the play model of hysteresis. We have found that the ECB is targeting the key interest rate over a seven years window, implying that the ECB is following a hybrid approach to price stability in line with average inflation target. We also have found hysteresis effects in the dynamic adjustment of ECB´s target interest rate.
    Keywords: inflation target, price-level targeting, key interest rates
    JEL: E43 E52
    Date: 2019–01
  9. By: McQuinn, Kieran; Varthalitis, Petros
    Abstract: In this paper we examine the performance of the Irish economy over the period 2008 to 2014. In particular we examine whether the recovery observed was due to the successful adoption of structural reforms in labour and product markets or whether the improved performance was due to a rebalancing of the Irish economy, post 2008, away from the disproportionate influence of the construction (non-tradable) sector and back to the more productive tradable sector? Prior to 2007 had seen the emergence of a significant, property-related credit boom which resulted in the Irish economy being increasingly influenced by the non-tradable sector. This was in sharp contrast to the earlier period of the Celtic tiger, which had mainly relied on export-orientated growth. We use a small open economy DSGE model with a tradable and a non-tradable sector to examine this issue. Our results suggest that the financial crisis acted as a rebalancing mechanism for the Irish economy, with the tradable sector contracting less and recovering quicker than the non-tradable sector. Our model-based simulations indicate that the Irish recovery is mostly export-driven with structural reforms playing a very minor role in stimulating growth in the immediate period after the crisis.
    Keywords: Trade, Openness, Reforms, DSGE
    JEL: F3 F41 F43
    Date: 2018–12–06
  10. By: Alessandro Daraio; Andrea Naldini; Roman Römisch (The Vienna Institute for International Economic Studies, wiiw); Gessica Vella; Enrico Wolleb
    Abstract: The study investigates the effects of Cohesion Policy (CP) which occur in a country other than the one in which CP resources were actually spent. The study estimates that macroeconomic spillovers significantly contribute to the impact of CP. Spillovers directed to EU countries represent around 9% of the total annual CP expenditure. Other spillovers to Non-EU countries are around 8% of the CP expenditure. Macro and micro spillovers together arrive at 21% of the annual CP expenditure, 67% of which is distributed among EU countries. Around 20% of the CP expenditure can trigger sectoral spillover effects in the environment, transport and higher education sectors. The analysis demonstrates that externalities reinforce EU growth and competitiveness without CP deserting its convergence objective.
    Keywords: EU Cohesion Policy, spillovers, macroeconomics, higher education and research, transport, environment
    JEL: C54 C67 C68 D62 I20 O52 Q50 R50
    Date: 2019–01
  11. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: In one open two-country economy, a higher domestic productivity level raises both mean and variance of wealth dynamic, and can lead to a greater accumulation of safe assets. The empirical evidences on the 19 countries of Eurozone confirm that the safe assets exchange supports the international risk-sharing across countries. Moreover, in comparison with the risky investments (FDI and Portfolio Equities), the safe assets (Bonds) are the dominant driver of global imbalances within Eurozone.
    Keywords: Current Account,Endogenous Portfolio Choice,Safe Assets,Produc-tivity Level
    Date: 2018–05
  12. By: Daniel Dejuán (Banco de España); Corinna Ghirelli (Banco de España)
    Abstract: The aim of this paper is to investigate the effect of policy uncertainty on firms’ investment decisions. We focus on Spain for the period 1998-2014. To measure policy-related uncertainty, we use a new macroeconomic indicator constructed for this country. We find strong evidence that policy uncertainty reduces corporate investment. Furthermore, the heterogeneous results suggest that the adverse effect of policy uncertainty is particularly relevant for highly vulnerable firms. In particular, non-exporting firms, small and medium enterprises, as well as firms in poorer financial condition are shown to decrease investment significantly more than their counterparts. Overall, these results are consistent with the hypotheses that policy-related uncertainty reduces corporate investment through increases in precautionary savings or to worsening of credit conditions.
    Keywords: corporate investment, policy uncertainty, financial frictions.
    JEL: D80 E22 G18 G31 G38
    Date: 2018–12

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