nep-eec New Economics Papers
on European Economics
Issue of 2019‒03‒25
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone By Timo Henckel; Gordon D. Menzies; Peter Moffat; Daniel J. Zizzo
  2. Tree Networks to Assess Financial Contagion By Ahelegbey, Daniel Felix; Giudici, Paolo
  3. Modelling the Demand for Euro Banknotes By António Rua
  4. Effectiveness of policy and regulation in European sovereign credit risk markets: a network analysis By Buse, Rebekka; Schienle, Melanie; Urban, Jörg
  5. Brexit and Indirect Impact Routes through Global Value Chains By Ali-Yrkkö, Jyrki; Kuusi, Tero
  6. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  7. Tariffs, Domestic Import Substitution and Trade Diversion in Input-Output Production Networks: how to deal with Brexit By Giammetti, Raffaele
  8. (Mis)Matches of Institutions: The EU and Varieties of Capitalism By Katja Kalkschmied; Joern Kleinert
  9. Horizon Europe: The RHOMOLO ex-ante assessment By Martin Christensen; Andrea Conte; Simone Salotti
  10. The effect of possible EU diversification requirements on the risk of banks' sovereign bond portfolios By Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
  11. What is the Investment Loss due to Uncertainty? By Theodore Panagiotidis; Panagiotis Printzis
  12. Calibrating GDP fan charts using probit models with a comparison to the approaches of the Bank of England and Riksbank By David Turner; Thomas Chalaux
  13. Effects of tax-benefit policy changes across the income distributions of the EU-28 countries: 2017-2018 By EUROMOD, EUROMOD

  1. By: Timo Henckel (Australian National University & Centre for Applied Macroeconomic Analysis); Gordon D. Menzies (University of Technology Sydney & Centre for Applied Macroeconomic Analysis); Peter Moffat (University of East Anglia); Daniel J. Zizzo (University of Queensland & Centre for Applied Macroeconomic Analysis)
    Abstract: We use the behavior of inflation among Eurozone countries to provide information about the degree of credibility of the European Central Bank (ECB) since 2008. We define credibility along three dimensions-official target credibility, cohesion credibility and anchoring credibility - and show in a new econometric framework that the latter has deteriorated in recent history; that is, price setters are less likely to rely on the ECB target when forming inflation expectations.
    Keywords: credibility; infl?ation; expectations; anchoring; monetary union; inferential expectations
    JEL: C51 D84 E31 E52
    Date: 2019–02–21
  2. By: Ahelegbey, Daniel Felix; Giudici, Paolo
    Abstract: We proposes a two-layered tree network model that decomposes financial contagion into a global component, composed of inter-country contagion effects, and a local component, made up of inter-institutional contagion channels. The model is effectively applied to a database containing time series of daily CDS spreads of major European financial institutions (banks and insurance companies), and reveals the importance monitoring both channels to assess financial contagion. The empirical application revealed evidence of a high inter-country and inter-institutional vulnerability at the onset of the global financial crisis in 2008 and during the sovereign crisis in 2011. The result further identifies Belgium and France as central to the inter-country contagion in the Euro area during the financial crisis, while Italy dominated during the sovereign crisis. The French corporates Groupama, Credit Industriel and Caisse d'Epargne were central in the inter-institutional contagion in both crises.
    Keywords: Financial Crisis, Graphical Lasso, Inter-Country Contagion, Inter-Institutional Contagion, Sovereign Crisis, Sparse Covariance Selection
    JEL: C38 G01 G2
    Date: 2019–01–28
  3. By: António Rua
    Abstract: Liquidity management is a key mission of a central bank. In particular, the adequate provision of banknotes requires the understanding of what drives currency demand in a continuously changing environment. The challenge is even bigger in the case of the European monetary union where the euro continues to develop into a well-established currency outside borders. The focus is on modelling euro banknotes demand namely by considering its denominational breakdown. Such an analysis allows to unveil the heterogeneous role played by the several drivers while providing a more in depth modelling of currency demand. The econometric approach pursued allows to take on board the interconnections across denominations both in the long- and short-run dynamics.
    JEL: C32 E41 E50
    Date: 2019
  4. 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. JEL Classification: G20, G01, G17, C32, C55, G28
    Keywords: bootstrap spillover-measures, financial crises, financial stability and systemic risk in the Eurozone, high-frequency CDS, policy and regulation
    Date: 2019–03
  5. By: Ali-Yrkkö, Jyrki; Kuusi, Tero
    Abstract: Abstract In this study, we analyze the trade linkages between the United Kingdom (UK), Finland, and the European Union (EU). We calculate the value-added content of trade through complex global value chains (GVCs), which may involve numerous production stages and third countries. Our results show that the importance of the UK as a trading partner for Finland has decreased during the last 15 years, and the tendency has been stronger than that between the UK and other EU countries, on average. We compare the importance of the UK to that of other countries by extracting the total amount of the Finnish value added that is generated in the value chains involving individual countries. Through this comparison, we find that the UK ranks as the sixth most important country. We further decompose the total value added into components that quantify the value added that is generated through direct trade with the UK and the indirect trade that is channeled through third countries. We find that roughly one third of the total value added is generated through indirect trade and two thirds through direct trade. Our analysis also suggests that one fifth of both the Finnish and EU value-added trade to the UK passes through the UK to other countries. The main destination countries are the United States (US), Germany, and France.
    Keywords: Global value chain, Brexit, United Kingdom, Gross domestic product, Impact, Indirect, Route, Value added
    JEL: F13 F14 F23 L23
    Date: 2019–03–14
  6. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2018–09
  7. By: Giammetti, Raffaele
    Abstract: This paper challenges and complements existing studies on the economic impact of Brexit providing a discussion of the UK's decision to leave the EU and how it will affect international trade networks and value-added. Using the World Input-Output Database, we develop a multi-sector inter-country model that allows us to identify the channels through which the economic effects of Brexit would propagate. The inclusion of global value chains and indirect Brexit effects in the model leads to estimates that diverge with the results of the main literature. Indeed our findings, suggest that Brexit could be risky and costly not only for the UK but also for many EU countries. Furthermore, building on the Dietzenbacher and Lahr (2013) method of hypothetical expansion, we develop a second model and present the first empirical analysis on the consequences of domestic import substitution and trade diversion policies in Input-Output schemes. We found that allowing sectors and countries to partly substitute foreign products, leads to significantly lower losses for both macro-regions. In the second model, the UK and EU27 would lose, at worst, the 0.05 and 0.5 percent of value-added, respectively.
    Keywords: Brexit, trade barriers, tariffs, input-output analysis, value chains, import substitution, production networks.
    JEL: C67 F13 F14 O21 R15
    Date: 2019–03–18
  8. By: Katja Kalkschmied (University of Graz, Austria); Joern Kleinert (University of Graz, Austria)
    Abstract: We study the institutional crisis of the European Union by harnessing a supermodular game approach, which sees institutions as self-sustaining bundle of rules that are subject to many-fold complementarities. Institutional systems evolve over time and feature country-specific characteristics. Introducing supranational regulations may alter the effectiveness of a set of complementary national institutions and yield negative economic outcomes. These negative effects may be temporary if the national institutional system changes towards a new, superior equilibrium. The strength and direction of the effect of newly introduced supranational regulations is country-specific and depends on: (i) the fit of the institutional system to its environment, (ii) the strength of the complementarities among institutions within and between countries, and (iii) the distance of the EU regulation to optimal regulation in the particular country. We assess the five scenarios brought forward in the White Paper on the future of Europe (European Commission (2017)) following our theoretical framework and discuss the conditions under which each scenario works.
    Keywords: EU integration process ; Endogenous institutions ; Institutional complementarities ; Heterogeneous systems; Common regulations; institutional mismatches
    JEL: F15 F55 C73
    Date: 2019–01
  9. By: Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: In 2018 the European Commission has published its proposal for its future research and innovation (R&I) programme, Horizon Europe, a €100 billion programme that will succeed Horizon 2020.Horizon Europe is designed around three pillars: support researchers and projects (Open Science), pursue industrial leadership related to societal issues (Global challenges), and boost market-creating innovation (Open Innovation). The RHOMOLO dynamic CGE model has been used for policy simulations to estimate the economic impact of Horizon Europe. The analysis compares three alternative policy designs to a scenario without the policy: Continuation, in which Horizon Europe is implemented similarly to the previous Horizon 2020; Centralisation, in which the programme is reinforced by centralising at the EU level a third of the national competitive-based project funding; and Decentralisation, in which the programme is implemented at the national level. The RHOMOLO simulations suggest that Horizon Europe can contribute to higher aggregate GDP and employment, with considerable potential regional heterogeneity.
    Keywords: rhomolo, region, growth, impact assessment, modelling, R&D, R&I, Horizon Europe, Horizon 2020, investment
    JEL: C68 E61 R12
    Date: 2019–03
  10. By: Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
    Abstract: Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries' sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of “home bias”, i.e., the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios and quantify the system-wide losses in the presence of fire-sales. Under our assumptions about how banks respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may mitigate fire-sale externalities, but may be ineffective in reducing portfolio risk, including tail risk. JEL Classification: G01, G11, G21, G28
    Keywords: bank regulation, diversification, home bias, sovereign-bank nexus, sovereign risk
    Date: 2019–03
  11. By: Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; Rimini Centre for Economic Analysis); Panagiotis Printzis (Department of Business Administration, University of Macedonia, Greece)
    Abstract: We investigate the effect of uncertainty on investment. We employ a unique dataset of 25000 Greek firms' balance sheets for 14 years covering the period before and after the eurozone crisis. A dynamic factor model is employed to proxy uncertainty. The investment performance of 14 sectors is examined within a dynamic investment model. Robust GMM estimates of the investment rate model reveal a high degree of heterogeneity among these sectors. Overall uncertainty affects negatively investment performance and this effect substantially increased in the years of crisis. Agriculture and Mining are the least affected and the most affected ones include Manufacturing, Real Estate and Hotels. Focusing on the response of investment to uncertainty, it emerges that (relative) smaller firms are affected more compared to larger ones.
    Keywords: Greek firms, Uncertainty, Volatility, GMM, Panel data
    JEL: C23 D22 D81 D92 G31
    Date: 2019–03
  12. By: David Turner; Thomas Chalaux
    Abstract: Fan charts were pioneered by the Bank of England and Riksbank and provide a visuallyappealing means to convey the uncertainty surrounding a forecast. This paper describes amethod for parameterising fan charts around GDP growth forecasts by which the degree ofuncertainty is based on past forecast errors, but the skew is derived from a probit modelbasedassessment of the probability of a future downturn. The probit-based fan chartsclearly out-perform the Bank of England and Riksbank approaches when applied toforecasts made immediately preceding the Global Financial Crisis. These examples alsohighlight weaknesses with the Bank of England and Riksbank approaches.The Riksbank approach implicitly assumes that forecast errors are normallydistributed, but over a long track record this is unlikely to be the case becauseforecasters are generally poor at predicting downturns, which leads to bias and skewin the pattern of forecast errors. Thus, the Riksbank fan chart is neither an accuraterepresentation of past forecast errors, nor is it a reflection of the risk assessmentunderlying the forecast.The Bank of England approach relies heavily on the judgment of the members ofthe Monetary Policy Committee to assess risks. However, even when they havecorrectly foreseen the nature of future risks, the quantitative translation of theserisks into the fan chart skew has been too timid. Perhaps one reason for this is thatthe fan chart prediction intervals based on historical forecast errors already appearquite wide so that inflating them by adding skew may appear embarrassing (at leastex ante).The approach advocated in this paper addresses these weaknesses by recognising thatforecast errors are not symmetrical: firstly, this leads to more compressed predictionintervals in the upper part of the fan chart (representing the possibility of under-prediction);and secondly, using the large forecast errors from past downturns to calibrate downwardskew clearly supports a more bold approach when there is a risk of a downturn. A weaknessof the probit model-based approach is that it will not predict atypical downturns. Forexample, in the current conjuncture it would not pick up risks associated with a ‘no deal’Brexit or a global trade war. However, a downturn triggered by atypical events may bemore severe if risk factors describing a typical business-financial cycle are also high.
    Keywords: downturn, economic forecasts, fan charts, recession, risk, uncertainty
    JEL: E58 E17 E65 E66 E01
    Date: 2019–03–08
    Date: 2019–03–15

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