nep-eec New Economics Papers
on European Economics
Issue of 2019‒02‒11
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Pockets of risk in European housing markets: then and now By Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
  2. The Transmission of Unconventional Monetary Policy to Bank Credit Supply: Evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  3. Spillover of Sentiment in the European Union: Evidence from Time- and Frequency-Domains By Vasilios Plakandaras; Aviral Kumar Tiwari; Rangan Gupta
  4. Immigration and unemployment in Europe: does the core-periphery dualism matter? By Esposito, Piero; Collignon, Stefan; Schicchitano, Sergio
  5. Measuring connectedness of euro area sovereign risk By Buse, Rebekka; Schienle, Melanie
  6. Cushion or catalyst? How welfare state generosity moderates the impact of economic vulnerability on populist radical right support By Ennser-Jedenastik, Laurenz; Köppl-Turyna, Monika
  7. Exchange rate uncertainty and import prices in the euro area By Blagov, Boris
  8. New Frontiers in the Euro Debate in Iceland By Thorgeirsson, Thorsteinn
  9. A survey of the long-term impact of Brexit on the UK and the EU27 economies By Patrick Bisciari
  10. Effectiveness of policy and regulation in European sovereign credit risk markets: A network analysis By Buse, Rebekka; Schienle, Melanie; Urban, Jörg
  12. Robustness of the Norwegian wage formation system and free EU labour movement. Evidence from wage data for natives By Ragnar Nymoen; Victoria Sparrman; Bjorn Dapi
  13. The interest rate exposure of euro area households By Tzamourani, Panagiota
  14. The Macroeconomic Projections of the German Government: A Comparison to an Independent Forecasting Institution By Robert Lehmann; Timo Wolllmershäuser
  15. 2013 – The Finnish Divergence By Anttonen, Jetro; Kuusi, Tero; Lehmus, Markku; Orjasniemi, Seppo
  16. The Evolution of Tradable and Non Tradable Employment: Evidence from France By Philippe Frocrain; Pierre-Noël Giraud

  1. By: Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
    Abstract: Using household survey data, we document evidence of a loosening of credit standards in Euro area countries that experienced a property price boom-and-bust cycle. Borrowers in these countries exhibited significantly higher loan-to-value (LTV) and loan-to-income (LTI) ratios in the run up to the financial crisis, and an increasing tendency towards longer-term loans compared to borrowers in other countries. In recent years, despite the long period of historically low interest rates and substantial house price increases in some countries, we do not find similar credit easing as before the crisis. Instead, we find evidence of a considerable change in borrower characteristics since 2010: new borrowers are older and have higher incomes than before the crisis. JEL Classification: E5, G01, G17, G28, R39
    Keywords: bubbles, financial crises, financial regulation, financial stability indicators, macroprudential policy, real estate markets, systemic risk
    Date: 2019–02
  2. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    Keywords: Unconventional Monetary Policy, TLTRO, credit supply, lending interest rates, bank-lending channel, Euro area, Portugal.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019–01
  3. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Aviral Kumar Tiwari (Center for Energy and Sustainable Development (CESD), Montpellier Business School, Montpellier, France); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: The issue of economic integration of the economies consisting the European Union across its various leaps of expansion throughout the years has been brought back to light during the recent sovereign crisis of the southern economies of the Union, that lead to the necessity of large bailout programs. In this paper we depart from the typical approach in the field and examine economic synchronization through the lenses of economic sentiment spillovers based on the economic confidence index for 14 European economies. In doing so, we analyze sentiment spillovers both in time- and in the frequency-domains in order to reveal the dissemination of the perception of economic agents about the future economic climate throughout the EU. Our empirical findings support the segregation of the Union in the core European countries and the southern economies and highlight the role of the Germany as the dominant economy setting the pace for the Union after 2008. Interestingly, large economies as Netherlands and Austria appear to be neutral, not because of an isolation from the region, but due to changing roles in transmitting and accepting expectations about the economic environment.
    Keywords: Sentiment, Spillover, Time- and Frequency-Domains, European Union
    JEL: C32
    Date: 2019–02
  4. By: Esposito, Piero; Collignon, Stefan; Schicchitano, Sergio
    Abstract: In this paper, we assess the impact of immigration and unemployment for a sample of 15 EU countries between 1997 and 2016. We test for the existence of a core-periphery dualism based on differences in macroeconomic fundamentals and labour market characteristics. We use a Panel Error Correction Model to assess the direction and persistence of the impact of immigration on domestic unemployment in the short and in the long run. In the long run, immigration is found to reduce unemployment in all peripheral-countries. In core countries, we find no long-run impact of immigration on unemployment due to substantial heterogeneity. As for short-run dynamics, we find a confirmation of the result that immigration reduces unemployment for the whole sample. Based on differences in employment protection and activity rates, larger impacts are found for Scandinavian and Anglo-Saxon countries, while lower and less significant impacts are found for Italy, Greece and Portugal.
    Keywords: International Migration,Unemployment,European Union,Panel Data
    JEL: C23 E23 F22 J61
    Date: 2019
  5. By: Buse, Rebekka; Schienle, Melanie
    Abstract: We introduce a method for measuring default risk connectedness of euro zone sovereign states using credit default swap (CDS) and bond data. The connectedness measure is based on an out-of-sample variance decomposition of model forecast errors. Due to its predictive nature, it can respond more quickly to crisis occurrences than common in-sample techniques. We determine sovereign default risk connectedness with both CDS and bond data for a more comprehensive picture of the system. We find evidence that several observable factors drive the difference of CDS and bonds, but both data sources still contain specific information for connectedness spill-overs. Generally, we can identify countries that impose risk on the system and the respective spill-over channels. In our empirical analysis we cover the years 2009-2014, such that recovery paths of countries exiting EU and IMF financial assistance schemes and responses to the ECB's unconventional policy measures can be analyzed.
    Keywords: Variance decomposition,Sovereign risk,Connectedness,Credit default swaps,Bonds,Eurozone crisis
    JEL: C58 G01 G15 C32
    Date: 2019
  6. By: Ennser-Jedenastik, Laurenz; Köppl-Turyna, Monika
    Abstract: The rise of populist radical right parties represents one of the most dramatic shifts in European party systems of the past decades. Although it has been established that the populist radical right's core appeal centers around issues of immigration and multiculturalism rather than economic matters, there has been a debate in the literature about the role of socioeconomic factors as a driver of PRRP success. We focus on two strands of argument relating to the welfare state and its impact on PRRP support. On the one hand, generous social policy regimes may mitigate the adverse economic effects of globalization and thus make workers less vulnerable to the appeal of populist radical right parties (the inoculation hypothesis). On the other hand, generous welfare regimes may make voters more concerned about increased numbers of low-skilled immigrants entering a country and potentially claiming benefits paid for largely by the taxes and contributions of the native population (the welfare chauvinism hypothesis). Our results suggest several channels through which the welfare state affects votes for the PRRP. Firstly, social protection seems to moderate economic vulnerability: in countries with higher relative redistribution and/or poverty prevention, the economically vulnerable are less likely to vote for the PRRP. Secondly, the direct effect of social welfare measures on the populist vote is positive when considering individual voters' positions. Thirdly, a stronger welfare state contributes to increasing the salience of the immigration platform for voting decisions. As a result, voters in high-redistribution countries are more likely to vote for the PRRP if they have a more moderate view on migration.
    Keywords: Populism,Right-Wing Populism,Welfare State,Party Systems,Europe,Social Protection
    Date: 2019
  7. By: Blagov, Boris
    Abstract: This paper analyses the effects of exchange rate uncertainty on the pricing behaviour of import firms in the euro area. Uncertainty is measured via the volatility of the structural shocks to the exchange rate in a non-linear VAR framework and is an important determinant of import prices. An increase in exchange rate uncertainty is associated with a fall in prices on average, which suggests that the exchange rate risk is borne by the importers. The analysis utilizes a dataset on industrial import prices, disaggregated by origin of imports. Controlling for intra- and extra-euro area trade is important.
    Keywords: exchange rate uncertainty,exchange rate pass-through,non-linearities,import price inflation,extra-euro area trade
    JEL: C11 C22 F31
    Date: 2018
  8. By: Thorgeirsson, Thorsteinn
    Abstract: The debate on currency arrangements and monetary policy frameworks in lceland has been motivated by developments in lceland and internationally in recent decades. Historically, lcelanders' colonial experience and struggle to retain control of vital natural resources made them hesitant participants in the European integration process. While sidestepping direct participation in the process leading to EU and EMU membership, they joined EFTA, the EEA and Schengen. Economic growth and development have been rapid, but the modernisation and liberalisation of the economy have been attended by signi:ficant volatility in nominal and real variables. At the same time, the European integration process has continued with its own set of challenges. It is in this context that a vibrant debate has taken place on the choice of currency and associated policies. The main emphasis has been on whether to adopt the euro (through EU membership) or retain the Icelandic króna with the most efficacious monetary policy framework possible. This article offers a review of salient contributions to the debate and the main lessons drawn from it. The key themes of the debate involve the impact currency choice would have on economic growth and resilience to shocks. While the early debate was mostly concerned with trade-theoretic issues, institutional factors have become increasingly important. A new theory concerning a heretofore overlooked policy variable, the evolution of inequality as measured by the wage-productivity gap, is discussed. It is shown to be potentially important for economic and financial outcomes, with implications for the debate.
    Keywords: Currency; exchange rates; monetary stability; financial stability; euro; factor incomes; distribution; wage productivity gap;
    JEL: E12 E13 E31 E32 E42 E52 E58 E63 E64 N12 N14 N22 N24 O47
    Date: 2018–10–12
  9. By: Patrick Bisciari (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper reviews a sample of studies on the long-term impact of Brexit on GDP and welfare for both the UK and EU economies. It considers only official and academic studies published before the end of November 2018. The paper highlights the very wide range of results, especially for the UK, reflecting great uncertainty. The negative economic impact is more limited for the EU27 and for most Member States. Small open economies closely related to the UK are more hit than others. This is the case for Ireland due to geographical proximity, for Luxembourg with its economy specialising in financial services and for Cyprus and Malta as they are Commonwealth countries. When only the trade channel of Brexit is estimated, GDP (or welfare) losses are around 1 percentage point of GDP in the Netherlands and in Belgium while these average 0.6 percentage point of GDP in the EU27. For a same Brexit scenario, the results depend on the model specifications, on the channels considered and on some key assumptions. For the UK higher GDP/welfare losses are found for reduced-form approaches, when a productivity shock is added and, also for the EU, for global value chain approaches. Higher GDP/welfare losses are also associated with higher non-tariff trade barriers. Results are sensitive to some parameters such as the reaction of trade volumes to changes in tariffs and non-tariff trade barriers (trade elasticities). Reaching a Free Trade Agreement could limit the GDP/welfare losses both for the UK and the EU Member States compared to an orderly no deal (WTO scenario). If the UK remains in the Single Market or the Customs Union, the GDP/welfare losses induced by Brexit could be even more contained. This justifies the economic interest for both the UK and the EU Member States to reach an agreement on their future relationship.
    Keywords: Brexit, trade, integration, EU
    JEL: F13 F14 F15 F17
    Date: 2019–01
  10. By: Buse, Rebekka; Schienle, Melanie; Urban, Jörg
    Abstract: We study the impact of changes in regulations and policy interventions on systemic risk among European sovereigns measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time.
    Keywords: Financial Crises,Policy and Regulation,Financial Stability and Systemic Risk in the Eurozone,High-Frequency CDS,Bootstrap Spillover-Measures
    JEL: G20 G01 G17 C32 G28
    Date: 2019
  11. By: Sabina Szymczak (Gdansk University of Technology, Gdansk, Poland); Aleksandra Parteka (Gdansk University of Technology, Gdansk, Poland); Joanna Wolszczak-Derlacz (Gdansk University of Technology, Gdansk, Poland)
    Abstract: This paper examines the relationship between the relative position of industries in Global Value Chains (GVCs) and wages in ten Central and Eastern European countries in the period 2005-2014. We combine GVC measures of global import intensity of production, upstreamness (distance from final use), and the length of the value chain (based on WIOD) with micro-data on workers from EU-SILC. We find that the wages of CEEC workers are higher when their industry is at the beginning of the chain, far from final demand (high upstream) or at the end (low upstreamness – sectors close to final demand) than in the middle. Secondly, wage changes depend on the interplay between upstreamness and GVC intensity. In sectors close to final demand, greater production fragmentation, measured either by global import intensity or by vertical specialisation, is associated with lower wages. Higher upstream, this effect is not sustained.
    Keywords: wage, GVC, upstreamness, production fragmentation, CEECs
    JEL: F14 F16 J31
    Date: 2019–01
  12. By: Ragnar Nymoen; Victoria Sparrman; Bjorn Dapi (Statistics Norway)
    Abstract: Norway experienced a high immigration flow after the EEA directive in 2004 stating workers right to free movement within the European Union and EEA-countries. There is no clear consensus in the literature on how immigration affects native wages, but some studies using Norwegian micro data have estimated a negative effect of higher immigration for some type of workers. In this paper, to capture that the wage setting is highly coordinated in Norway, we model a system of native wages for three sectors; manufacturing, private service industries and public sector. We estimate that labour immigration has had a negative effect on the attainable wage growth for natives in all three sectors, but that the largest and most direct impact on wages has been in the private service industries. Immigration is found to be exogenous with respect to the parameters of our model of wage formation.
    Keywords: Cointegration; Error-correcting adjustment; Estimation and hypothesis testing in cointegrated models; Macroeconomic fluctuations and transmission mechanisms; Short-run and long-run impact; Vector Autoregressive Processes; Pattern wage bargaining; Small open economy wage policies
    JEL: C52 E24 E31 J31
    Date: 2019–02
  13. By: Tzamourani, Panagiota
    Abstract: We estimate the "unhedged interest rate exposure" (URE) of euro area households. The URE is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and reflects the direct gains and losses in interest income flows incurred by households after such a change. It is defined as the difference between maturing assets and maturing liabilities at a given point in time (Auclert 2019). We examine the distribution of the UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. The median household in the euro area has a positive interest rate exposure, indicating that it would gain, in the first instance, from an increase in the interest rate, all other things remaining constant. Households in the lower end of the net wealth and income distribution, younger households and mortgagors, have negative interest rate exposure and would lose from an increase in interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with a high prevalence of ARMs have interest rate exposure distributions skewed to the left, with negative mean interest rate exposure. Interest gains/losses after a monetary policy shock can be substantial for households with negative interest rate exposure, particularly for mortgagors, and of a similar (absolute) magnitude to capital gains/losses from associated changes in house prices. Besides the direct distributional consequences and the implications for monetary policy, the distribution of the interest rate exposures may help explain the general public's views with the respect to the prevailing monetary policy regime or the central bank.
    Keywords: interest rate exposure,URE,monetary policy,distributional effects,adjustable rate mortgage (ARM),Household Finance and Consumption Survey (HFCS)
    JEL: D31 E21 E52 E58
    Date: 2019
  14. By: Robert Lehmann; Timo Wolllmershäuser
    Abstract: This paper investigates the macroeconomic projections of the German government since the 1970s and compares it those of the Joint Economic Forecast, which is an in-dependent forecasting institution in Germany. Our results indicate that nominal GDP projections are upward biased for longer forecast horizons, which seems to be driven by a false assessment of the decline in Germany’s trend growth and a systematic failure to correctly anticipate recessions. We show that the German government also deviates from the projections of the Joint Economic Forecast, which in fact worsened the forecast accuracy. Finally, we find evidence that these deviations are driven by political motives.
    Keywords: macroeconomic forecasting, forecast accuracy, independent forecasting, political economic biases
    JEL: E30 E37 E39
    Date: 2019
  15. By: Anttonen, Jetro; Kuusi, Tero; Lehmus, Markku; Orjasniemi, Seppo
    Abstract: Abstract In this paper, we use the synthetic control method to analyze the Finnish economic performance after the onset of the Great Recession. Our main interest is to study the slow recovery from the global downturn that began in 2008. We identify the synthetic control with pre-crisis data (1996–2007). It provides the counterfactual response of the Finnish economy to the crisis in the absence of idiosyncratic shocks that affected Finland but not the synthetic control unit. We find that the Finnish GDP growth closely follows the synthetic control until 2013. After that there is a striking divergence in the economic growth of Finland and the expected economic behavior, as represented by the counterfactual. The divergence between the Finnish GDP and its synthetic control is mainly due to underperforming of the Finnish net exports. The consumption expenditures, on the other hand, outperform the synthetic control unit right after the financial crisis, but starting from 2013, they underperform as well. We find that our results are relatively robust to alternative methodological specifications.
    Keywords: Synthetic control method, Comparative case studies, Great Recession, European debt crisis
    JEL: E32 F43 F44
    Date: 2019–02–06
  16. By: Philippe Frocrain (CERNA i3 - Centre d'économie industrielle i3 - CNRS - Centre National de la Recherche Scientifique - PSL - PSL Research University - MINES ParisTech - École nationale supérieure des mines de Paris); Pierre-Noël Giraud (CERNA i3 - Centre d'économie industrielle i3 - CNRS - Centre National de la Recherche Scientifique - PSL - PSL Research University - MINES ParisTech - École nationale supérieure des mines de Paris)
    Abstract: The objective of this paper is to investigate the evolution of employment in the tradable and non-tradable sectors in France over 1999-2015. We find that tradable employment makes up the minority of French employment and has decreased over this period, dropping from 27.5% to 23.6% of total employment. There has been significant restructuring within the sector: tradable services jobs now make up the majority of tradable jobs and have grown sharply, while employment has declined in the rest of the tradable sector (manufacturing, agricultural and mining industries). We also identify a large wage and labor productivity gap between tradable and non-tradable sectors. Finally, we examine the distribution of tradable jobs across French local labor markets, and how their development affects non-tradable employment locally. Using the empirical approach developed by Moretti (2010), we find that for every 100 tradable jobs created in a French employment area between 2008 and 2016, 80 additional non-tradable jobs were created within the same area. JEL Classification: F16, F66, O52, R15, R23
    Keywords: tradable,non-tradable,globalization,multiplier,local labor market,French employment structure
    Date: 2019–01–21

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