nep-eec New Economics Papers
on European Economics
Issue of 2019‒02‒18
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Effects of Macroeconomic, Fiscal and Monetary Policy Announcements on Sovereign Bond Spreads: An Event Study from the EMU By António Afonso; João Tovar Jalles; Mina Kazemi
  2. The euro-area output gap through the lens of a DSGE model By Lorenzo Burlon; Paolo D'Imperio
  3. Do the ECB’s monetary policies benefit emerging market economies? A GVAR analysis on the crisis and post-crisis period By Andrea Colabella
  4. Short-Term and Long-Term Determinants of Moderate Wage Growth in the EU By Kiss, Aron; Van Herck, Kristine
  5. Outline of a redistribution-free debt redemption fund for the euro area By Marika Cioffi; Pietro Rizza; Marzia Romanelli; Pietro Tommasino
  6. The impact of the ECB’s targeted long-term refinancing operations on banks’ lending policies: the role of competition By Desislava C. Andreeva; Miguel García-Posada
  7. Quantitative easing in the euro area and SMEs' access to finance: Who benefits the most? By Anne Kathrin Funk; ;
  8. SMEs’ financing: Divergence across Euro area countries? By S. ROUX; F. SAVIGNAC
  9. Pro-competitive effects of globalisation on prices, productivity and markups: Evidence in the Euro Area By R. S.-H. LEE; M. PAK
  10. Labour and capital remuneration in the OECD countries By Stefania Gabriele; Enrico D’Elia
  11. Exchange rate pass-through to import prices in Europe: A panel cointegration approach By Antonia Arsova
  12. Assessing Pension Expenditure Determinants – the Case of Portugal By Maria Teresa Medeiros Garcia; André Fernando Rodrigues Rocha da Silva
  13. The link between labor cost and price inflation in the euro area By Bobeica, Elena; Ciccarelli, Matteo; Vansteenkiste, Isabel
  14. Central Bank Policies and Financial Markets: Lessons from the Euro Crisis By Ashoka Mody; Milan Nedeljkovic
  15. Domestic banks as lightning rods? Home bias and information during Eurozone crisis By Saka, Orkun
  16. Income Inequality and the Size of Government: A Causal Analysis By Martin Guzi; Martin Kahanec
  17. Firms’ inflation expectations and investment plans By Adriana Grasso; Tiziano Ropele
  18. The economic effects of big events: evidence from the Great Jubilee 2000 in Rome By Raffaello Bronzini; Sauro Mocetti; Matteo Mongardini

  1. By: António Afonso; João Tovar Jalles; Mina Kazemi
    Abstract: We assess the impact of announcements corresponding to different fiscal and monetary policy measures on the 10-year sovereign bond yield spreads (relative to Germany) of the 10 EMU countries during the period 01:1999 - 07:2016. Implementing pooled and country-fixed effects OLS regressions, we find that the European Commission’s (EC) releases of the excessive deficit procedure significantly affect the yield spreads. The EC releases of higher debt and better budget balance forecasts contribute to the rise and the decline of spreads, respectively. Moreover, we find that the announcements of the ECB’s key interest rates together with the longer-term refinancing operations (LTROs) and the first covered bond purchase programme (CBPP1) negatively affect sovereign yield spreads in our sample of EMU countries.
    Keywords: sovereign yields, fiscal policy, monetary policy, event analysis, panel data
    JEL: C23 E52 E62 G10 H63
    Date: 2019–02
  2. By: Lorenzo Burlon (Bank of Italy); Paolo D'Imperio (Sapienza University of Rome)
    Abstract: The paper provides estimates of the euro-area output gap, based on a relatively standard medium scale DSGE model estimated recursively with Bayesian techniques over the period 1985-2016. The main findings can be summarized as follows. First, our measure of output gap identifies episodes of expansion and recession generally in line with the official business cycle dating of the CEPR. Second, unlike measures of output gap obtained by means of statistical filtering techniques, real-time DSGE-based estimates are remarkably stable and hence are less prone to ex-post revisions. According to our results, the euro-area output gap was -3.4% in 2016, more negative than assessed by most economic analysts and institutions (spanning a range between from 0 and to -2%), but arguably more consistent with the still weak dynamics of both labour costs and core inflation.
    Keywords: output gap, potential output, DSGE modelling, Bayesian estimation, euro area
    JEL: C11 E32 E37 E66
    Date: 2019–01
  3. By: Andrea Colabella (Bank of Italy)
    Abstract: This paper studies the spillover effects of the ECB’s monetary policies on non-euro area countries over the period 2004-2016, using a GVAR methodology, applied to a large sample of countries and an ample set of variables. Monetary policies are proxied by short-term interest rates and the Wu and Xia’s (2016) shadow rates in the euro area, the US and the UK. Identification is performed via a Cholesky decomposition in the euro area only. An increase in the euro area shadow interest rate triggers a broad-based and persistent output decline abroad, especially strong in Central Eastern and South-Eastern European economies. The euro area shadow rate increase is also transmitted to the short-term interest rates of a number of countries, although such rises are short-lived and not as widespread as the GDP spillovers. There is evidence that differences in countries’ responses to the euro area monetary shock depend on their characteristics. The spillover effects are transmitted mainly through the trade channel and also, to a lesser extent, the short-term interest rate channel.
    Keywords: global VAR, spillover, euro area monetary policy, Europe, CESEE
    JEL: C32 E32 E52 E58 F41 O52
    Date: 2019–02
  4. By: Kiss, Aron (European Commission); Van Herck, Kristine (European Commission, Directorate Employment, Social Affairs and Inclusion)
    Abstract: This paper analyses the factors explaining moderate wage growth in the EU in the post-crisis period. It investigates whether the historical relationship between wages and unemployment has weakened and whether composition effects moderated wage growth. The results suggest a negative answer to both questions. Wages in the EU have not stopped reacting to unemployment developments after the 2008 crisis. Wage growth was moderate because of low inflation, low trend productivity growth, and high unemployment. There are only a few Member States with a significant 'shortfall' in wage growth, including both low and high-unemployment countries. Migration, ageing and collective bargaining institutions appear to have mostly transitory effects on wage growth. During the last decade, changes in the composition of the workforce had a small but positive impact on wage growth in most of the EU, especially due to increasing average age and education level. In some Member States such as Germany, Italy, Luxembourg and Portugal, composition effects were a main driver of wage growth.
    Keywords: wage growth, Wage Phillips curve, European Union
    JEL: E24
    Date: 2019–02
  5. By: Marika Cioffi (Bank of Italy); Pietro Rizza (Bank of Italy); Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: Public debts in the euro area have increased sharply due to the economic crisis, and remain at historically high levels in several countries. In a monetary union, high-debt members represent a permanent threat to financial stability, as they are subject – even if fundamentally solvent – to significant rollover risk. Given the tight financial and economic links between member states, a liquidity crisis in one of them would trigger area-wide turmoil. While prudent fiscal policies are essential to address the legacy debt problem, it takes time for them to bring the debt back to (at least) pre-crisis levels. Against this background, the paper explores the feasibility and desirability of transferring a share of national public debts to a European Redemption Fund. In exchange, each country would transfer a yearly flow of resources to the Fund. We show that it is possible to design such a scheme so that it does not entail any ex-ante cross-country redistribution, while the euro area as a whole would benefit as the lowering of member states’ annual refinancing needs would improve financial stability. The fraction of mutualized debt would be fully redeemed over a reasonable number of years. The scheme would not jeopardize national commitment to debt reduction; if anything, market discipline would become more effective at the margin.
    Keywords: Euro area, sovereign debt, debt redemption fund, financial stability
    JEL: E6 H12 H60
    Date: 2019–01
  6. By: Desislava C. Andreeva (European Central Bank); Miguel García-Posada (Banco de España)
    Abstract: We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities.
    Keywords: unconventional monetary policy, TLTROs, lending policies, competition
    JEL: G21 E52 E58
    Date: 2019–02
  7. By: Anne Kathrin Funk (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically, bringing the economy close to a credit crunch. It was only after the start of the European Central Bank (ECB) quantitative easing programme in early 2015 that bank lending improved sustainably. This study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small- and medium-sized enterprises using firm-level data of the Survey on the Access to Finance of Enterprises and a fixed effects model. The analysis comprises several measures of financial access, such as credit availability, financial constraints, and interest rates. The micro-level nature of the data allows me to distinguish between aggregate and heterogeneous effects across firm size, age, sector, and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries that need the most stimulus benefit the most from the PSPP.
    Keywords: Unconventional monetary policy, credit channel, bank lending, ECB, SME
    JEL: E44 E51 E52 E58
    Date: 2019–02–14
  8. By: S. ROUX (Insee, Crest et Ined); F. SAVIGNAC (Banque de France)
    Abstract: This paper studies the divergence/convergence process of European countries as regard the financing behavior of small and medium sized enterprises. Using a firm level and country representative survey, we construct country-time indicators of SMEs’ use of three external financing sources: bank loans, credit line/overdraft and trade credit. These indicators account for composition effects and demand effects. We find substantial differences between countries in the SMEs’ use of the three financing sources. In particular, the cross-country differences related to SMEs’ use of bank loans have significantly increased over the period 2010-2014. This divergence is not related to a global increase in the volatility of this use between countries. Instead, it has been driven by a sharper increase (resp decrease) in the countries where SMEs’ use was initially higher (resp. lower). Finally, we investigate whether SMEs’ uses of financing sources are correlated at the country level with various macroeconomic and banking structure indicators. The results suggest that indicators about banking concentration are good candidates to explain the cross-country divergence of SMEs’ use of bank loans.
    Keywords: credit constraints, bank financing, trade credit, institutional factors
    JEL: G31 G01 D22 C35
    Date: 2018
  9. By: R. S.-H. LEE (Insee, Polytechnique et Crest-LMA); M. PAK (OCDE)
    Abstract: Global trade has recently slowed down after a peak in the 1990s and early 2000s. Existing literature shows evidence of pro-competitive effects of trade liberalisation during this booming period on prices, productivity and markups. The goal of this paper is to assess whether such pro-competitive effects are still carried on in the manufacturing industry of five Euro Area countries (Austria, Germany, Spain, France and Italy). Our analysis is based on Melitz and Ottaviano’s (2008) theoretical framework and its empirical setup by Chen et al. (2004, 2009). Our contribution is twofold. First, we use traditional trade indicators (gross and value added exports and imports) but also novel indicators that account for the development of global value chains. Second, from the findings of Chen et al. (2004, 2009), we go further by investigating the effect of trade at sector level with respect to quality upgrading and firm concentration. We find that pro-competitive effects are more significant when using import penetration in value-added terms and such effects are particularly strong in sectors with low concentration. Indeed, higher concentration seems to mitigate the trade-induced competition. However, our model focuses on price competition and further research on the quality upgrading would be complementary to our results.
    Keywords: inflation, markups, productivity, competition, globalisation
    JEL: E31 F12 F14 L11 L16
    Date: 2018
  10. By: Stefania Gabriele (Italian Parliamentary Budget Office); Enrico D’Elia (Ministry of Economy and Finance)
    Abstract: Functional distribution is an important driver of inequality. When market remuneration of labour and capital are very uneven, as they have been in recent decades, personal distribution tends to polarise, jeopardising social cohesion. This fact explains a renewed interest in functional distribution. Nevertheless, in the estimates on functional distribution the role of self-employed income has been undervalued. National accounts provide estimates of the compensation of employees and the operating surplus, but do not refer to self-employed workers as a specific productive factor and implicitly include their income in the ‘mixed income’ and in some minor items. Most analysts estimate self-employed income by attributing the same average unit compensation of the corresponding employees to each worker, that in fact is not necessarily consistent with the GDP estimates.Other estimates take a fixed share of the ‘mixed income’, usually the same for every country. When national accounts are very detailed, as in the case of Italy, it is possible to estimate self-employment income from non-financial accounts by sectors with some accuracy, under some weak assumptions. In this paper we analyse four workable estimates, since only the total amount of ‘mixed income’ received by households is available for most countries. We analyse the data of the OECD countries focusing mainly on eight large countries: the US, Japan, the UK, Germany, France, the Netherlands, Spain and Italy. The results are somehow unexpected. First of all, evaluating the income of the self employed properly, the overall labour share is declining much faster than reported by the official data in some countries, and more countries showed a decrease in the 2000s. Indeed, the real unit compensation of the self employed reduced significantly in most of the eight countries (and in some of the others) after the mid or the end of the nineties, since self-employment has been used extensively to reduce the overall labour cost. Unit labour cost (ULC) also increased much slower (or even declined more) after 2000 in most countries, shedding new light on the pattern of international competitiveness and the drivers of inflation. The share of operative surplus of non-financial and financial corporations, properly recalculated, has had different dynamics, whereas the component related to imputed rentals of owner occupied houses played an unexpectedly important role. Finally, the mark-up on variable production costs has been higher than expected and its dynamic has been faster in most countries, showing a minor sensitivity to the business cycle. Indeed, statistical data on self-employment income is not fully satisfactory in many countries, thus our estimation of self-employment income represents only a first step towards a deeper comprehension of the dynamic of primary distribution. Indirect evidence of the reliability of our estimates is in their capacity to explain some key variables more accurately, strictly related to labour share, mark-up and ULC, which are income inequality, inflation and export performance.
    Keywords: functional distribution, labour income, self-employed workers, ULC, mark-up
    JEL: E25 E24 O47
    Date: 2019
  11. By: Antonia Arsova (Leuphana University Lueneburg, Germany)
    Abstract: This paper takes a panel cointegration approach to the estimation of short- and long-run exchange rate pass-through (ERPT) to import prices in the European countries. Although economic theory suggests a long-run relationship between import prices and exchange rate, in recent empirical studies its existence has either been overlooked, or it has proven dicult to establish. Resorting to novel tests for panel cointegration, we nd support for the equilibrium relationship hypothesis. Exchange rate pass-through elasticities, estimated by two di erent techniques for cointegrated panel regressions, give insight into the most recent development of the ERPT.
    Keywords: exchange rate pass-through, import prices, panel cointegration, cross-sectional dependence, common factors
    JEL: C12 C23 F31
    Date: 2019–02
  12. By: Maria Teresa Medeiros Garcia; André Fernando Rodrigues Rocha da Silva
    Abstract: Pension expenditure is a concern for the sustainability of public finances in the European Union. Therefore, assessing pension expenditure determinants is crucial. This study aims to disentangle the impact of demographic and economic variables, such as ageing, productivity, and unemployment, on pension expenditure. Using Portuguese time-series data, from 1975 to 2014, statistical evidence was found of co-integration between unemployed people aged between 15 and 64 years old, apparent productivity of labour, the old-age dependence index and pension expenditure as a share of gross domestic product. The use of a vector error correction model, with impulse-response functions and variance decomposition, showed that ageing has an almost insignificant impact in the long-run, when compared with unemployment and productivity.
    Keywords: pension expenditure, determinants, linear regression analysis
    JEL: C32 C51 C52 H55
    Date: 2019–02
  13. By: Bobeica, Elena; Ciccarelli, Matteo; Vansteenkiste, Isabel
    Abstract: This paper documents, for the first time in a systematic manner, the link between labor cost and price inflation in the euro area. Using country and sector quarterly data over the period 1985Q1-2018Q1 we find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. The dynamic interaction between prices and wages is time-varying and depends on the state of the economy and on the shocks hitting the economy. Our results show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path. JEL Classification: C32, E24, E31
    Keywords: euro area, inflation, labor costs, pass-through, structural VAR
    Date: 2019–02
  14. By: Ashoka Mody (Princeton University); Milan Nedeljkovic (Metropolitan University, FEFA)
    JEL: E52 E58 G10
    Date: 2018–12
  15. By: Saka, Orkun
    Abstract: European banks have been criticized for holding excessive domestic government debt during economic downturns, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks' risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks' private sector exposures were (at least) equally affected by a rise in home bias. Finally, consistent with these patterns, I propose a new debt reallocation channel based on informational frictions and show that informationally closer foreign banks increase their relative exposures when sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
    JEL: F21 F34 F36 G01 G11 G21
    Date: 2019–02–05
  16. By: Martin Guzi (Masaryk University, CELSI and IZA); Martin Kahanec (Central European University, University of Economics in Bratislava, CELSI, and GLO)
    Abstract: Expansion of the public sector and redistributive policies may reduce income inequality, but formal tests suffer from the problem of endogeneity of government size with respect to the distribution of income. Studying 30 European countries over the period 2004-2015, we apply instrumental variable estimation techniques to identify a causal relationship between income inequality and government size, measured as the government expenditure share in GDP. Using a novel instrument â the number of political parties in the ruling coalition â we find that accounting for the possible endogeneity of government size increases the magnitude of the estimated negative effects. Our findings thus suggest that much of the literature underestimates the true role of the government in attenuating income inequality. The estimated relationship between income inequality and government size persists in a series of robustness checks.
    Keywords: inequality, redistribution, government size, instrumental variable, Gini index
    JEL: D31 D60 H20
    Date: 2018–12
  17. By: Adriana Grasso (LUISS University); Tiziano Ropele (Bank of Italy)
    Abstract: In past years there have been suggestions for monetary policy to engineer higher inflation expectations to stimulate spending. We examine the relationship between the inflation expectations of firms and their investment plans using Italian business survey data over the period 2012-2016. We show that higher expected inflation is positively correlated with firms’ willingness to invest. In our baseline specification, a one percentage point rise in expected inflation is associated with a higher probability of reporting higher investment plans by 4.0 percentage points. This expansionary effect operates through the standard interest rate channel and its magnitude is positively correlated with firms’ liquidity and debt position.
    Keywords: investment expenditure, inflation expectations, survey data
    JEL: E22 E31 E58
    Date: 2018–12
  18. By: Raffaello Bronzini (Banca d'Italia); Sauro Mocetti (Banca d'Italia); Matteo Mongardini (Banca d'Italia)
    Abstract: This paper assesses the short- and long-term economic impact of the Great Jubilee 2000 on the city of Rome’s economy; this is an important Catholic event that occurs every 25 years. By applying the synthetic control approach, we find that the value added per capita increases slightly in the short term while in the long term it is not significantly different from what it would have been if Rome had not hosted the Jubilee. However, we do find a significant effect on the employment rate. Consistently with these findings, we document a shift of the local economy towards less productive sectors, such as construction and services requiring a lower skill content, and an overall productivity loss for/in Rome with respect to the counterfactual scenario. The investment in infrastructure, facilities and urban requalification did not significantly affect tourism or house prices in the long run, with exception of peripheral residential areas which experienced an appreciation.
    Keywords: mega events, synthetic control method, urban economic growth, house prices
    JEL: R00 R11 R12 R58
    Date: 2019–02

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