nep-eec New Economics Papers
on European Economics
Issue of 2019‒03‒11
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Assessing the Macroeconomic Impact of the ECB’s Asset Purchase Programme in a Dynamic Nelson–Siegel Modelling Framework By Zhou, Siwen
  2. Effects of labour and product market regulation on worker flows: Evidence for the euro area using micro data By Robert Anderton; Benedetta Di Lupidio
  3. International capital flows at the security level – evidence from the ECB’s asset purchase programme By Bergant, Katharina; Fidora, Michael; Schmitz, Martin
  4. The real effects of zombie lending in Europe By Tracey, Belinda
  5. Key sectors in Input-Output Production Networks: an application to Brexit By Gallegati, Mauro; Giammetti, Raffaele; Russo, Alberto
  6. Negative Interest Rate Policy and the Influence of Macroeconomic News on Yields By Rasmus Fatum; Naoko Hara; Yohei Yamamoto
  7. The Missing Link: Monetary Policy and The Labor Share By Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel
  8. Demand and Supply-side Drivers of Labour Productivity Growth: an empirical assessment for G7 countries By Fabrizio Antenucci; Matteo Deleidi; Walter Paternesi Meloni
  9. The impact of QE on liquidity: evidence from the UK Corporate Bond Purchase Scheme By Boneva, Lena; Elliott, David; Kaminska, Iryna; Linton, Oliver; McLaren, Nick; Morley, Ben
  10. Brexit: Everyone Loses, but Britain Loses the Most By María C. Latorre; Zoryana Olekseyuk; Hidemichi Yonezawa; Sherman Robinson
  11. Which Sanctions Matter? Analysis of the EU/Russian Sanctions of 2014 By Belin, Matej; Hanousek, Jan
  12. The Structural Dynamics of Income Distribution:Technology, Wages and Profits By Andrea Coveri; Mario Pianta
  13. Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces By Tito Boeri; Andrea Ichino; Enrico Moretti; Johanna Posch
  14. Effects of Austerity: Expenditure- and Tax-based Approaches By Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco

  1. By: Zhou, Siwen
    Abstract: This paper examines the macroeconomic impact of the Asset Purchase Programme (APP) in the euro area on the basis of a set of macro-finance variables included in a Dynamic Nelson–Siegel modelling framework. The empirical results emphasise the role of the APP’s portfolio balance channel in stimulating economic growth and inflation, both at the aggregate euro area level and at the disaggregated country-specific level. The portfolio balance channel works at the aggregated level through greater international price competitiveness, easier conditions on capital markets, and higher asset prices. Moreover, the results suggest that the initial APP announcement has increased the annual real GDP growth rates and HICP inflation in the euro area by up to 0.7% and 0.8%, respectively. At the disaggregated level, there is evidence for the stimulation of bank lending through the portfolio balance channel in the core countries. Moreover, the stronger rise in stock prices in the core countries shows that the wealth effect triggered by portfolio rebalancing is mainly concentrated in the richer member countries. A comparison of the country-specific macroeconomic impact of APP shows that while overall GDP responses are broadly comparable across countries, the peripheral countries that have implemented effective labour market reforms have benefited significantly from bond purchases in stimulating inflation. This points to the need for further labour market reforms in Italy. A reform package of labour and product market reforms can help to reduce the resulting transition costs.
    Keywords: Quantitative Easing, Asset Purchase Programme, European Central Bank, Term Structure Model, Portfolio Balance Channel
    JEL: E43 E44 E52 F31 F42
    Date: 2019–02–08
  2. By: Robert Anderton; Benedetta Di Lupidio
    Abstract: Evidence using macroeconomic data shows that employment-output elasticities in the euro area increased during the recovery from the crisis, especially in those countries where reforms aimed to facilitate labour market adjustments. In this paper, we investigate whether similar Okun-style empirical relationships show similar changes at the micro level. We econometrically estimate the responsiveness of individual worker flows (i.e. flows of individuals from employment to unemployment and from unemployment to employment) to GDP dynamics in euro area countries during the period 2000-2015; we also investigate whether structural reforms implemented in those countries are associated with a change in the flexibility of job transitions after the crisis. The econometric specifications include, in addition to GDP, micro (individual-level) explanatory variables from the Eurostat Labour Force Survey (EU-LFS) – i.e., socio-demographic variables such as gender, age, and education – in order to capture the key determinants of the individual flows. Overall, the results presented in this paper are consistent with previous results using aggregate data and show a higher responsiveness of individual worker flows to changes in GDP after the crisis, particularly for a group of euro area countries which implemented significant reforms. Moreover, we find that a number of measures which decrease the stringency of regulation (such as reforms which reduce employment protection legislation, product market regulation, and collective bargaining) increase the flexibility of the labour market as they have a positive and statistically significant impact on worker flows.
    Keywords: Worker flows, Linear probability model, Labour market regulations, Structural reforms, Great Recession
    Date: 2019
  3. By: Bergant, Katharina; Fidora, Michael; Schmitz, Martin
    Abstract: The paper analyses euro area investors’ portfolio rebalancing during the ECB’s Asset Purchase Programme (APP) at the security level. Based on net transactions of domestic and foreign securities, the authors observe euro area sectors’ capital flows into individual securities, cleaned from valuation effects. Their empirical analysis – which accounts for security-level characteristics – shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme (PSPP) and other euro-denominated debt securities, towards foreign debt instruments, including ‘closest substitutes’, i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. The analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Date: 2018–10
  4. By: Tracey, Belinda (Bank of England)
    Abstract: Around 10% of European firms were in receipt of subsidized bank loans following the peak of the European sovereign debt crisis in 2011. To what extent did such forbearance lending contribute to the subsequent low output growth experienced by the euro area? In this paper, we address this question by developing a quantitative model of firm dynamics in which forbearance lending and firm defaults arise endogenously. The model provides a close approximation to key euro-area firm statistics over the period 2011 to 2014. We evaluate the impact of forbearance lending by considering a counterfactual scenario in which firms no longer have access to loan forbearance. Our key finding is that aggregate output, investment and total factor productivity are higher in the absence of forbearance lending than in the benchmark scenario that includes forbearance lending. This suggests that forbearance lending practices contributed to the low output growth across the euro area following the onset of the sovereign debt crisis.
    Keywords: Forbearance lending; zombie firms; firm defaults; firm dynamics
    JEL: G21 G32 L25
    Date: 2019–03–01
  5. By: Gallegati, Mauro; Giammetti, Raffaele; Russo, Alberto
    Abstract: This paper presents the first detailed and holistic description of the European production network (EPN) and provides different rankings of the most 'systemically important' industries involved in Brexit. Employing techniques of complex networks analysis and Input-Output traditional tools, the study identifies those industries that are key in the complex structure of the UK-EU trade relationships. The method developed would help policy-makers to better understand which tariff would have a more distortive impact, which export sector should be pushed, which imports should be safeguarded. Such information may have foremost importance in the negotiations between the UK and EU. Our findings suggest that Brexit would be not just a problem for the UK, as it is often portrayed, but any form of Brexit could propagate affecting the global production system. Further, by inspecting industries centrality within the EPN, we find that the UK could be less exposed to trade barriers than EU countries.
    Keywords: Brexit, trade barriers, tariffs, key sector, centrality measures, input-output analysis, production networks, value chains.
    JEL: C67 F13 F14 R11
    Date: 2019–03–06
  6. By: Rasmus Fatum (Alberta School of Business, University of Alberta (E-mail:; Naoko Hara (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yohei Yamamoto (Department of Economics, Hitotsubashi University (E-mail:
    Abstract: We consider the influence of domestic and US macroeconomic news surprises on daily bond yields over the January 1999 to January 2018 period for four advanced Negative Interest Rate Policy (NIRP) economies - Germany, Japan, Sweden, and Switzerland. Our results suggest that the influence of macroeconomic news surprises is for all four countries under study during the NIRP period non-existent or noticeably weaker than during the preceding Zero Interest Rate Policy (ZIRP) period. Our results are consistent with the suggestion that NIRP is characterized by a lower bound that is no less constraining than the zero lower bound that characterizes ZIRP.
    Keywords: NIRP, Bond Yields, Macroeconomic News
    JEL: E43 E52 E58
    Date: 2019–02
  7. By: Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel
    Abstract: The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken.
    Keywords: Labor Share; monetary policy shocks
    JEL: C52 E23 E32
    Date: 2019–02
  8. By: Fabrizio Antenucci; Matteo Deleidi; Walter Paternesi Meloni
    Abstract: The recent slowdown in labour productivity growth experienced in advanced economies is generally considered one of the main causes of the current phase of economic stagnation. This has led scholars to carry out a number of theoretical and empirical studies to identify the long-run determinants of productivity growth. The present work aims to fall within this debate, with a peculiar focus on the relevance of the Kaldor-Verdoorn law. To this purpose, we empirically investigate on the determinants of labour productivity growth both for the total economy and for the manufacturing sector, comparing the role played by demand- and supply-side factors. A Structural Vector Autoregressive (SVAR) model is estimated for G7 countries from 1970 to 2017. Although the analyses confirm the positive role of supply-side factors in fostering productivity growth, our findings generally validate also the relevance of demand-side factors. Additionally, the positive effect generated by demand factors on labour productivity growth suggests that supply-side measures would be not sufficient to enhance productivity. Our findings suggest that demand-side policies are likely to foster productivity by also stimulating supply-side factors, particularly in the manufacturing sector of the economy.
    Keywords: Labour Productivity; Kaldor-Verdoorn Law; Capital Deepening; SVAR
    JEL: O47 D24 E22
    Date: 2019–02
  9. By: Boneva, Lena (Bank of England); Elliott, David (Bank of England); Kaminska, Iryna (Bank of England); Linton, Oliver (University of Cambridge); McLaren, Nick (Bank of England); Morley, Ben (Bank of England)
    Abstract: In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to £10 billion of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE’s CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE’s demand for bonds and auction participants’ supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
    Keywords: Quantitative easing; market liquidity; market-making; corporate bonds
    JEL: E52 E58 G12 G23
    Date: 2019–03–01
  10. By: María C. Latorre (Universidad Complutense de Madrid); Zoryana Olekseyuk (German Development Institute (Deutsches Institut für Entwicklungspolitik [DIE])); Hidemichi Yonezawa (Statistics Norway); Sherman Robinson (Peterson Institute for International Economics)
    Abstract: This paper examines 12 economic simulation models that estimate the impact of Brexit. We provide their range of results and explain their associated assumptions and methodologies (macroeconometric models, computable general equilibrium [CGE] models, or mixed approaches). CGE models simulate the operation of market economies, solving for changes in equilibrium prices and quantities (production, employment, demand, and international trade) for all sectors in the economy. Macroeconometric models focus on economic aggregates and macro shocks, such as interest rates, the exchange rate, inflation, risk, uncertainty, and government expenditure/revenue. Most of the studies find adverse effects for the UK and the EU-27. The UK's GDP losses from a hard Brexit (reversion to World Trade Organization rules due to a lack of UK-EU agreement) range from –1.2 to –4.5 percent in most of the models analyzed. A soft Brexit (e.g., Norway arrangement, which seems in line with the nonbinding text of the political declaration of November 14, 2018 on the future EU-UK relationship) has about half the negative impact of a hard Brexit. Only two of the models derive gains for the UK after Brexit because they are based on unrealistic assumptions. We analyze more deeply a CGE model that includes productivity and firms' selection effects within manufacturing sectors à la Melitz (2003) and the operations of foreign multinationals in services. Based on this latest model, we provide a complete overview and explanation of the likely economic impact of Brexit on a wide range of macroeconomic variables, namely GDP, wages, private consumption, capital remuneration, aggregate exports, aggregate imports, and the consumer price index. The data underlying this analysis are available at
    Keywords: Economic Methodology, Economic Simulation, Foreign Trade, Multinationals, Foreign Direct Investment, European Economy
    JEL: B41 F17 F14 C63 F23 F21
    Date: 2019–03
  11. By: Belin, Matej; Hanousek, Jan
    Abstract: In this paper we use a natural experiment of reciprocal imposition of trade sanctions by Russia and the EU since 2014. Using UNCTAD/BACI bilateral flows data we take this unique opportunity to analyse both sanctions. In particular, we study the effectiveness of narrow versus broadly defined sanctions, and differences in the effectiveness of sanctions imposed on exports and imports. We show that the Russian sanctions imposed on European and American food imports resulted in about 8 times stronger decline in trade flows than those imposed by the EU and the US on exports of extraction equipment. These results do not appear to be driven by diversion of trade flows via non-sanctioning countries. Hence the difference in sanctions' effectiveness can be attributed to the broader range of sanctioned goods and potentially to a stronger position of enforcement of sanctions on imports rather than exports.
    Keywords: Bilateral trade flows; Differences-in-differences; International trade; Russia; sanctions; UNCTAD/BACI data
    JEL: C01 C23 F14
    Date: 2019–02
  12. By: Andrea Coveri (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Mario Pianta (Scuola Normale Superiore, Florence)
    Abstract: In the last four decades, an increasingly skewed income distribution has favored capital at the expense of labour and has been coupled with ever growing inequalities. Merging a Neo-Schumpeterian approach to innovation with a Post-Keynesian theoretical framework, this work contributes to the analysis of the structural determinants of functional income distribution. Building on Pianta and Tancioni (2008), we propose a simultaneous model on wage and profit dynamics identifying technological change, offshoring strategies and role of trade unions as key factors which shape the power relations between capital and labour. On the empirical ground, we perform an industry-level analysis extending and improving the Sectoral Innovation Database (SID), which accounts for 38 manufacturing and service sectors for six major European countries (France, Germany, Italy,Netherlands, Spain and United Kindgom) from 1994 to 2014. We find that, despite the structural asymmetries between industries’ patterns of evolution, labour productivity growth and product innovation have a positive impact on both distributive components, while a rather negative effect of process innovation on wages is detected. Offshoring processes generally emerge as profit-enhancing while represent a reliable firms’ weapon to reduce labour costs, although a remarkable heterogeneity arises when the technological nature of offshoring strategies is accounted for; finally, union density tends to be positively associated with wage dynamics, suggesting the relevance of labour market institutions in conditioning the patterns of income distribution.
    Keywords: Distribution, innovation, offshoring, union density, Europe, industries.
    JEL: F12 F15 J31 J51 L16 L6 L8 O33 O52
    Date: 2019
  13. By: Tito Boeri; Andrea Ichino; Enrico Moretti; Johanna Posch
    Abstract: In many European countries, wages are determined by collective bargaining agreements intended to improve wages and reduce inequality. We study the local and aggregate effects of collective bargaining in Italy and Germany. The two countries have similar geographical differences in firm productivity—with the North more productive than the South in Italy and the West more productive than the East in Germany—-but have adopted different models of wage bargaining. Italy sets wages based on nationwide contracts that allow for limited local wage adjustments, while Germany has moved toward a more flexible system that allows for local bargaining. We find that, as a consequence, Italy exhibits limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, while Germany has larger geographic wage differences and a tighter link between local wages and local productivity. While the Italian system is successful at reducing nominal wage inequality, it also creates costly geographic imbalances. In Italy, low productivity provinces have significantly higher non-employment rates than high productivity provinces, because employers cannot lower wages, while in Germany the relationship between non-employment and productivity is significantly weaker. In Italy, the relationship between real wages and productivity is negative, with lower real wages in the North compared to the South, since the latter has low housing costs but similar nominal wages. Thus, conditional on having a job, Italian workers have higher purchasing power in the South, but the probability of having a job is higher in the North. We conclude that the Italian system has significant costs in terms of forgone aggregate earnings and employment because it generates a spatial equilibrium where workers queue for jobs in the South and remain unemployed while waiting. If Italy adopted the German system, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively. Our findings are relevant for several other European countries with systems similar to Italy’s.
    JEL: J0 R1
    Date: 2019–02
  14. By: Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco
    Abstract: We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt over GDP ratio. Tax-based plans have the opposite effect and cause large and long lasting recessions. These results also apply to the recent episodes of European austerity which in this respect were not especially different from previous cases.
    Keywords: austerity; fiscal adjustment plans; output growth
    JEL: E60 E62
    Date: 2019–03

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