nep-eec New Economics Papers
on European Economics
Issue of 2019‒01‒28
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. 57 Channels (And Nothin On) - Does TV-News on the Eurozone Affect Government Bond Yield Spreads? By Julia Wolfinger; Lars P. Feld; Ekkehard A. Köhler; Tobias Thomas
  2. Euro Area Macroeconomics, where do we stand twenty years later ? By Catherine Mathieu; Henri Sterdyniak
  3. The Return of the European Wage Phillips Curve By Fabrice Orlandi; Werner Roeger; Anna Thum-Thysen
  4. Estimating the monetary policy interest-rate-to-performance sensitivity of the European banking sector at the zero lower bound By Bernd Hayo; Kai Henseler; Marc Steffen Rapp
  5. “Another Look at Causes and Consequences of Pension Privatization Reform Reversals in Eastern Europe" By Nikola Altiparmakov
  6. The role of non-performing loans for bank lending rates By Bredl, Sebastian
  7. The Economic Effects of a Tax Shift from Direct to Indirect Taxation in France By Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
  8. A ‘New Modesty’? Level Shifts in Survey Data and the Decreasing Trend of ‘Normal’ Growth By Christian Gayer; Bertrand Marc
  9. The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area By William Arrata; Benoit Nguyen; Imene Rahmouni-Rousseau; Miklos Vari
  10. Total factor productivity (TFP) and fiscal consolidation: how harmful is austerity? By Ioanna Bardaka; Ioannis Bournakis; Georgia Kaplanoglou
  11. Banks’ Trading after the Lehman Crisis – The Role of Unconventional Monetary Policy By Isabel Schnabel; Johannes Tischer
  12. Nominal wage rigidity in the EU countries before and after the Great Recession: evidence from the WDN surveys By Eva Branten; Ana Lamo; Tairi Room
  13. How Do Technical Barriers to Trade Affect Foreign Direct Investment? By Mahdi Ghodsi
  14. Trade Uncertainty and Investment in the Euro Area By Christian H Ebeke; Jesse Siminitz
  15. Intra-EEA Stri Database: Methodology and Results By Sebastian Benz; Frédéric Gonzales
  16. Quantitative easing and sovereign bond yields: a global perspective By Dimitris Malliaropulos; Petros Migiakis
  17. Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone By Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
  18. Labour shares, employment protection and unions in European economies By Damiani, Mirella; Pompei, Fabrizio; Andrea, Ricci
  19. Trade and credit: revisiting the evidence By Eduardo Gutiérrez; Enrique Moral-Benito

  1. By: Julia Wolfinger; Lars P. Feld; Ekkehard A. Köhler; Tobias Thomas
    Abstract: This paper empirically investigates the relationship between TV news coverage and the GIIPS countries’ bond yield spreads using daily data between January 1, 2007 and December 1, 2016. We employ 1,542,233 human coded news items from evening news shows of leading TV stations in 12 countries which include 37,859 news on the EU, on the Eurozone and on country-specific economic issues. We find that an increasing share of news about the Eurozone reduces yield spreads, especially when the news has a positive tonality. This hints at the effectiveness of political communication through the media by European institutions and in particular the European Central Bank (ECB). In conjunction with the tonality of the news, we find that country-specific news have a significant impact on GIIPS yield spreads. A higher share of positive/negative news is positively associated with a decrease/increase of the GIIPS yield spreads vis-à-vis Germany. Moreover, some news is not immediately and completely priced in by market participants when it is released. In addition, this peculiar effect of country specific news is stronger when the respective news is aired on the North American media market.
    Keywords: Eurozone, Euro, political communication, media coverage, yield spreads, dynamic macro panel, FGLS
    JEL: E58 G12 L80 N14
    Date: 2018
  2. By: Catherine Mathieu (Observatoire français des conjonctures économiques); Henri Sterdyniak (Observatoire français des conjonctures économiques)
    Abstract: For almost 20 years, euro area countries have been sharing a single currency. The drawbacks of the euro area framework were highlighted by the widening of imbalances prior to the 2007 financial crisis, and thereafter by the huge impact of the financial crisis, the public debt crisis in Southern countries, and the great recession. Prior to and after the crisis, EU institutions and Member States have not been able to implement either a common economic strategy, or satisfactory economic policy coordination. This did lead neither to a burst of the euro area, nor to a substantial change in its functioning. Euro area institutions were adapted, through the European Stability Mechanism, the fiscal treaty, the “first semester”, the European Central Bank’s support to MS, the banking union. These adaptations were painful. In mid-2018, the economic situation had clearly improved at the euro area level. However, the following question remains unsolved: can the functioning of the euro area be improved, accounting for divergent situations, interests and views in MS? Section 2 recalls proposals from EU institutions and from MS. Section 3 presents and discusses several economists’ viewpoints and proposals to improve the euro area policy framework. Some economists rely on financial markets to control domestic economic policies, some are in favour of the introduction of a euro zone budget and minister of finance, some are in favour of moving towards a federal EU with increased democracy, some make original proposals to cut public debts, and last some advocate better economic policy coordination.
    Keywords: Fiscal Policy; Policy coordination; EMU Governance
    JEL: E62 N14
    Date: 2018–12
  3. By: Fabrice Orlandi; Werner Roeger; Anna Thum-Thysen
    Abstract: In this paper we compare the accelerationist Phillips curve to the New-Keynesian Wage Phillips curve in Euro Area countries which went through major swings in the unemployment rate in recent years. We find that the New-Keynesian wage Phillips curve signals cyclical fluctuations in unemployment more clearly and yields less pro-cyclical estimates of the NAWRU in four crisis-hit EU member states (Greece, Spain, Ireland and Portugal) than a traditional Phillips curve model, which may not treat price rigidities adequately. Slightly augmenting the NKP model by allowing for real wage rigidities further improves the extraction of a cyclical unemployment component.
    JEL: E24 E31 E32
    Date: 2018–09
  4. By: Bernd Hayo (Philipps-Universitaet Marburg); Kai Henseler (Philipps-Universitaet Marburg); Marc Steffen Rapp (Philipps-Universitaet Marburg)
    Abstract: Using an event-study design, we investigate monetary policy interest-rate-to-performance sensitivity of the European banking sector over the 07/2012–06/2017 period when interest rates were (close to) zero. We apply the Wordscores approach to introductory statements of ECB's Governing Council press conferences to estimate a ‘shadow prime rate’. Based on short-run intraday event windows, we find shadow prime rate changes positively affect changes in the EURO-STOXX-Banks Future. Our findings add to the recent evidence documenting that banks benefit from increasing interest rate levels in a low-interest-rate environment.
    Keywords: ECB, central bank communication, banking sector, interest rate sensitivity, textual analysis, Wordscores
    JEL: E43 E52 E58 G14 G21
    Date: 2019
  5. By: Nikola Altiparmakov (Fiscal Council, Serbia)
    Abstract: In order for ‘carve-out’ pension privatization to improve long-term sustainability the transition should not be predominantly debt-financed, and private pension funds should deliver (net) rates of return tangibly higher than GDP growth. We show that none of the reforming countries in Eastern Europe was successful in fulfilling these two preconditions, even before the emergence of the global financial crisis. While existing literature mostly describes a recent wave of reform reversals as politically driven short-sighted policies that deteriorate long-term sustainability, we argue the contrary: that pension privatization structural deficiencies and disappointing performance allow reversals to improve the short-term stance without necessarily undermining long-term pension sustainability. We conclude that unless political consensus exists to support the multi-decade fiscal austerity required to finance pension privatization, reform adjustments and reversals can be a rational alternative to maintaining economically suboptimal or politically unstable pension systems in some Eastern European countries.
    Date: 2018–06
  6. By: Bredl, Sebastian
    Abstract: Against the backdrop of a high stock of non-performing loans (NPLs) in several European countries, this paper investigates the role of NPLs for lending rates charged for newly granted loans in the euro area. More precisely, it looks for an effect that extends beyond losses caused by that stock which have already been incorporated into the banks' capital positions. The paper focuses on the question of which channels are responsible for such a potential effect. The results indicate that a higher stock of net NPLs is associated with higher lending rates, whereby there are indications that this relation tends to be offset by loan loss reserves. Although the NPL stock affects banks' idiosyncratic funding costs as well, the latter do not seem to constitute an important link between the stock of NPLs and lending behavior. Furthermore, NPLs do not strongly affect the banks' interest rate pass-through.
    Keywords: lending rates,non-performing loans,impaired loans,funding costs
    JEL: G21 E43
    Date: 2018
  7. By: Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
    Abstract: This paper uses the European Commission's DSGE model QUEST to investigate the impact of alternative tax reforms shifting the tax burden away from labour or corporates, making the French tax system more growth friendly. These experiments consist in raising VAT and, simultaneously reducing either social security contributions borne by employers or corporate income taxes. These tax reforms overall entail positive and permanent effects on GDP and price competitiveness. Scenarios that imply cuts in social contributions borne by employers bring about more positive effects on employment, the trade balance and the general government deficit. By contrast, while lowering corporate taxes also gives rise to a positive GDP response, external price competitiveness and private investment, they negatively affect employment, the trade balance and the general government deficit.
    JEL: H30 E62 H20 H22
    Date: 2018–03
  8. By: Christian Gayer; Bertrand Marc
    Abstract: While the current level of the Economic Sentiment Indicator, which is well above its long-term average, is compatible with expanding economic activity, it has been associated with lower growth rates than those implied in the pre-recession period. Departing from the idea that the relationship between qualitative survey (‘soft’) and quantitative (‘hard’) data might have changed during the Great Recession due to a 'new modesty' of survey respondents, this paper goes one step further and examines to what extent this link might be constantly moving over longer time periods. Using rolling regressions and time-varying parameter models for the euro area, the paper shows that the growth rates typically implied by given survey results did not only fall during the Great recession, but already decreased rather systematically for close to 20 years before the crisis, i.e. since around 1990. This is true for the overall economy (measured by GDP growth), but also industrial production, construction production, and households consumption. Country-specific results for the GDP of the four largest euro-area economies are also presented. Furthermore, the paper suggests that business and consumer survey results can be used, beyond their usual short-term forecasting purposes, to gauge changes in long-term or potential growth. While the results should be interpreted as preliminary and experimental, they might be useful as a contribution to the assessment of post-crisis potential growth, not least since they are less subject to revisions than conventional methods based on production functions
    JEL: C32 E32 O47 O52
    Date: 2018–07
  9. By: William Arrata; Benoit Nguyen; Imene Rahmouni-Rousseau; Miklos Vari
    Abstract: Most short-term interest rates in the Euro area are below the European Central Bank deposit facility rate, the rate at which the central bank remunerates banks’ excess reserves. This unexpected development coincided with the start of the Public Sector Purchase Program (PSPP). In this paper, we explore empirically the interactions between the PSPP and repo rates. We document different channels through which asset purchases may affect them. Using proprietary data from PSPP purchases and repo transactions for specific (“special") securities, we assess the scarcity channel of PSPP and its impact on repo rates. We estimate that purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps. Using an instrumental variable, we find that the full effect may be up to six times higher.
    Keywords: Central banks and their policies;Repurchase agreements;Monetary policy;Money markets;Interest rates;Assets;Specialness, repo market, asset purchases, money market
    Date: 2018–12–07
  10. By: Ioanna Bardaka (Bank of Greece); Ioannis Bournakis (Middlesex University); Georgia Kaplanoglou (University of Athens)
    Abstract: Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity. Using a panel dataset of 26 OECD countries over the period 1980-2016 and employing panel vector autoregressive and error correction model specifications, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.
    Keywords: total factor productivity; fiscal consolidation; OECD countries; austerity; growth
    JEL: E62 C23 H68
    Date: 2018–12
  11. By: Isabel Schnabel; Johannes Tischer
    Abstract: Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse.
    Keywords: Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2018–08
  12. By: Eva Branten; Ana Lamo; Tairi Room
    Abstract: This paper studies the recent trends in nominal wage rigidity in a large group of EU countries, using survey data. We analyse two forms of nominal wage rigidity: downward nominal wage rigidity (DNWR) and the lagged response of wages to shocks. The frequency of wage changes, which is an indicator of lagged wage setting, slowed down in the aftermath of the Great Recession. We assess the possible reasons for this, and show that it was at least partially caused by a combination of a decline in average wage growth and persistent DNWR. In countries where wage growth slowed down more after the Great Recession, the frequency of wage changes declined more steeply as well. Our data allows evaluating the prevalence of DNWR in diverse economic circumstances. Like earlier research on this topic, we find that DNWR tends to be strongly prevalent, even in periods of slow economic growth and low wage inflation. DNWR declines during severe recessions but even then wage setting does not become completely flexible as the proportion of observed wage cuts is still below the level that would correspond to a flexible regime.
    Keywords: downward nominal wage rigidity, wage change frequency, survey
    JEL: B41 D22
    Date: 2018–06–15
  13. By: Mahdi Ghodsi (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Evidence from Central, East and Southeast Europe Trade liberalisation and the EU enlargement in the past two decades allowed European multinational enterprises (MNEs) to benefit from production fragmentation in Central, East and Southeast Europe (CESEE). Recent studies show that market regulations and standards that are embedded within Technical Barriers to Trade (TBTs) might not necessarily hamper trade but improve the quality of products, production procedures, and market efficiencies. However, complying with the regulations embedded in the TBTs imposed by a host country might be costly enough to discourage MNEs from investing there. Furthermore, MNEs from countries that impose more regulations and standards might be more capable of investing abroad. This article analyses how TBTs imposed by both home and host countries affect inward FDI stocks in the CESEE countries during the period 1996-2016. The results suggest that Specific Trade Concerns (STCs) raised on trade-restrictive TBTs imposed by CESEE countries induce ‘tariff jumping’ motives of investment to these countries, while regular TBTs as indications of positive externalities and efficiency gains at home discourage outward FDI. Besides, FDI stocks by non-EU28 countries are found to be stimulated by regular quality TBTs imposed by the host economies.
    Keywords: CESEE, FDI, MNE, quality NTM, TBT, TBT STC, regulations and standards, tariff jumping
    JEL: F13 F14 F21 F23
    Date: 2019–01
  14. By: Christian H Ebeke; Jesse Siminitz
    Abstract: We analyze the impact of trade policy uncertainty on investment in the euro area. Our identification strategy assumes that countries that are relatively more dependent on global trade networks exhibit a higher sensitivity of investment with respect to trade uncertainty. We find that the investment-to-GDP ratio is on average 0.8 percentage points lower for five quarters following a one standard deviation increase in the level of trade uncertainty. We demonstrate that these results are unlikely to be driven by omitted variables and that they are robust to different measures of trade uncertainty and trade openness. Our analysis suggests that the detrimental effect of trade tensions goes beyond lower trade growth, as uncertainty can reduce investment and the economy’s long-term growth potential.
    Date: 2018–12–11
  15. By: Sebastian Benz (OECD); Frédéric Gonzales (OECD)
    Abstract: This paper presents new data on regulatory barriers affecting services trade within the European Economic Area (EEA), covering 25 EEA countries, 22 sectors and five years (2014-2018). Following the methodology of the OECD Services Trade Restrictiveness Index (STRI), qualitative information is scored and weighted to produce binary composite indices. The resulting intra-EEA STRIs reveal that services trade restrictiveness within the Single Market is considerably lower than the applied MFN regime of those EEA members. Moreover, they show that EEA members have achieved significant regulatory harmonisation through their integration process.
    Keywords: composite indicators, services trade restrictions, Trade in services, trade liberalisation, trade policy
    JEL: F13 F15 F55
    Date: 2019–01–28
  16. By: Dimitris Malliaropulos (Bank of Greece); Petros Migiakis (Bank of Greece)
    Abstract: We document the existence of a global monetary policy factor in sovereign bond yields in a panel of 45 countries, consisting of both developed and emerging economies. This global factor is related to the size of the aggregate balance sheet of the four major central banks (Fed, ECB, Bank of Japan and Bank of England). Our estimates suggest that large-scale asset purchases and liquidity provision of major central banks following the Global Financial Crisis have contributed to a significant and permanent decline in long-term yields globally, ranging from 250 basis points for AAA rated sovereigns to 330 basis points for B rated sovereigns. Fiscally weaker Eurozone countries benefited most from Quantitative Easing, with their sovereign yields declining by 600-750 basis points, depending on the rating of their sovereigns. Our findings have important policy implications: normalizing monetary policy by scaling down the expanded balance sheets of major central banks to pre-crisis levels may lead to sharp increases in sovereign bond yields globally with severe consequences for financial stability, vulnerable sovereigns and the global economy
    Keywords: monetary policy; quantitative easing; sovereign bonds; interest rates; panel cointegration.
    JEL: E42 E43 G12 G15
    Date: 2018–11
  17. By: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
    Abstract: EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model that allows us to explain these patterns in the data, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
    Date: 2018–12
  18. By: Damiani, Mirella; Pompei, Fabrizio; Andrea, Ricci
    Abstract: We analyse the role that the liberalization of temporary contracts plays in labour share in some EU countries. The empirical analysis mainly relies on the EUKLEMS database and applies a difference-in-difference approach. Our results, focused on periods of different length (1996–2007 and 1996–2013), show that legislative innovations that favour the extensive use of temporary contracts negatively affect the labour share, likely because they lower employees’ average compensations. We hypothesize that these labour reforms, which lead to enduring skill deficits, thus failing to halt the erosion of the labour share of previous decades.
    Keywords: factor income distribution, labour regulation
    JEL: E25 J50
    Date: 2018–06
  19. By: Eduardo Gutiérrez (Banco de España); Enrique Moral-Benito (Banco de España)
    Abstract: This paper explores the effects of bank lending shocks on export behavior of Spanish firms. For that purpose, we combine Balance of Payments data on exports at the firmproduct-destination level with a matched bank-firm dataset incorporating information on the universe of corporate loans from 2002 to 2013. Armed with this dataset, we identify bankyear specific credit supply shocks following Amiti and Weinstein (2018) and estimate their impact on firms’ exports at the product-destination level. According to our estimates, credit supply shocks have sizable effects on both the intensive margin (amount exported) and the extensive margin of trade (decision to export).
    Keywords: credit shocks, exports, firm level data
    JEL: F10 F30 F40 G15 G21 G32
    Date: 2019–01

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