nep-eec New Economics Papers
on European Economics
Issue of 2019‒04‒15
eleven 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. Heterogeneity within the euro area: New insights into an old story By Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
  3. Independent Fiscal Institutions in the European Union: Is Coordination Required? By Debrun, Xavier
  4. Macroprudential policy in a monetary union with cross-border banking By Darracq Pariès, Matthieu; Kok, Christoffer; Rancoita, Elena
  5. The design of a sovereign debt restructuring mechanism for the euro area: Choices and trade-offs By Christophe Destais; Frederik Eidam; Friedrich Heinemann
  6. Taylor-rule consistent estimates of the natural rate of interest By Brand, Claus; Mazelis, Falk
  7. On the credit and exchange rate channels of central bank asset purchases in a monetary union By Darracq Pariès, Matthieu; Papadopoulou, Niki
  8. Does liquidity regulation impede the liquidity profile of collateral? By Schmidt, Kirsten
  9. Demographics and the natural real interest rate: historical and projected paths for the euro area By Papetti, Andrea
  10. Corporate Income Taxes and (Un-)Employment in the OECD By Antonio Estache; Beni Kouevi Gath
  11. Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation By Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian; Gartner, Hermann

  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.
    Date: 2019
  2. By: Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.
    Keywords: Euro area; Equilibrium exchange rates; Cluster analysis; Factor analysis; Macroeconomic imbalances
    JEL: F33 E5 C38
    Date: 2019
  3. By: Debrun, Xavier
    Abstract: Increased reliance on national frameworks to improve compliance with EU standards of fiscal soundness calls for coordination among EU member states. We focus on the rationale and forms of coordination among national independent fiscal institutions (IFIs). IFIs aim at strengthening governments’ incentives to adhere to national fiscal rules mainly through monitoring activities that provide non-partisan information on the conduct of fiscal policy to all stakeholders in the budget process. Such activities increase the costs of inadequate policies in terms of reputation loss, financing conditions, and electoral sanctions. The case for coordination is two-pronged. First, national IFIs are not all born equal, with questions remaining as to how some of them can effectively play their role. Accepting too many weak IFIs would undermine the aim of recent reforms to strengthen rules-based fiscal policy and bolster the stability of the euro area. Second, as national IFIs and the European Commission (EC) both monitor fiscal policies, disagreements could lead to cacophony and weaken IFIs’ impact on the public debate about fiscal policy. Thus, coordination should aim at (i) ensuring that all national IFIs converge to international best practice in their operations and (ii) mitigating the risk of cacophony in fiscal surveillance. To preserve national IFIs independence, coordination—both between the EC and IFIs and among the latter—should be limited to information exchanges and peer-pressure-through-emulation. A beefed-up European Fiscal Board would have a key role to play in facilitating such coordination.
    Keywords: Independent fiscal institutions, European Union, fiscal governance, international coordination, European Fiscal Board.
    JEL: F42 F55 H61
    Date: 2019–04–06
  4. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rancoita, Elena
    Abstract: We analyse the interaction between monetary and macroprudential policies in the euro area by means of a two-country DSGE model with financial frictions and cross-border spillover effects. We calibrate the model for the four largest euro area countries (i.e. Germany, France, Italy, and Spain), with particular attention to the calibration of cross-country financial and trade linkages and country specific banking sector characteristics. We find that countercyclical macroprudential interventions are supportive of mon-etary policy conduct through the cycle. This complementarity is significantly reinforced when there are asymmetric financial cycles across the monetary union, which provides a case for targeted country-specific macroprudential policies to help alleviate the burden on monetary policy. At the same time, our findings point to the importance of taking into account cross-border spillover effects of macroprudential measures within the Monetary Union. JEL Classification: E32, E44, E52, F36, F41
    Keywords: banking, DSGE, macroprudential policy, monetary policy
    Date: 2019–03
  5. By: Christophe Destais; Frederik Eidam; Friedrich Heinemann
    Abstract: This paper critically assesses several dimensions of a sovereign debt restructuring mechanism (SDRM) for the euro area. The novelty of our analysis is that we abstain from recommending one ideal model for a restructuring mechanism. Instead, we apply a menu-type approach. For five key institutional SDRM dimensions, we discuss the underlying fundamental trade-offs and discuss the pros and cons of different design choices. Specifically, we investigate the following SDRM dimensions: (i) the institutional assignments of responsibilities, (ii) the condition or decision rule that triggers a debt restructuring, (iii) the design and size of debt restructuring, (iv) the role and details of collective action clauses (CACs), and (v) the safeguards for financial stability in support for a SDRM. We conclude that there is no such thing as the single optimal SDRM. Design decisions require judgements on the underlying trade-offs and related assumptions on relative costs. Also, the search for an appropriate euro area SDRM design can benefit from complementarities. Ambition in one dimension can offer more degrees of freedom in another dimension. Our analysis implies that there is no convincing reason to further taboo the search for a euro area SDRM, as there are ways to combine the opportunities of a credible SDRM with financial stability.
    Keywords: Eurozone Crisis;Sovereign Debt Restructuring Mechanism;Collective Action Clauses
    JEL: H63 F53 G15
    Date: 2019–03
  6. By: Brand, Claus; Mazelis, Falk
    Abstract: We estimate the natural rate of interest for the US and the euro area in a semi-structural model comprising a Taylor rule. Our estimates feature key elements of Laubach and Williams (2003), but are more consistent with using conventional policy rules: we model inflation to be stationary, with the output gap pinning down deviations of inflation from its objective (rather than relative to a random walk). We relax some constraints on the correlation of latent factor shocks to make the original unobserved-components framework more amenable to structural interpretation and to reduce filtering uncertainty. We show that resulting natural rate metrics are more consistent with estimates from structural models. JEL Classification: C11, E32, E43, E52
    Keywords: Bayesian estimation, Beveridge-Nelson decomposition, equilibrium real rate, natural rate of interest, Taylor rule, unobserved components
    Date: 2019–03
  7. By: Darracq Pariès, Matthieu; Papadopoulou, Niki
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Pariès et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogenous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact. JEL Classification: E4, E5, F4
    Keywords: banking, bank lending rates, cross-country spillovers, DSGE models, financial regulation, non-standard measures
    Date: 2019–03
  8. By: Schmidt, Kirsten
    Abstract: We analyze the pledging behavior of Euro area banks during the introduction of the liquidity coverage ratio (LCR). The LCR considers only a subset of central bank eligible assets and thereby offers banks an arbitrage opportunity to improve their regulatory ratio by altering their collateral pledging with the European Central Bank. We use the existence of national liquidity requirements to proxy for banks’ incentives to exploit this differential treatment of central bank eligible assets. Using security-level information on collateral pledged with the central bank, we find that banks without a preceding national liquidity requirement pledge more and less liquid collateral than banks with a preceding national liquidity requirement after the LCR introduction. We attribute the difference across banks to a preparation effect of the liquidity regulation on the national level. JEL Classification: G21, G28, E42, E52, E58
    Keywords: central bank refinancing operations, liquidity regulation, monetary policy
    Date: 2019–03
  9. By: Papetti, Andrea
    Abstract: This paper employs an aggregate representation of an overlapping generation (OLG) model quantifying a decrease of the natural real interest rate in the range of -1.7 and -0.4 percentage points in the euro area between 1990 and 2030 due to demographics alone. Two channels contribute to this downward impact: the increasing scarcity of effective labor input and the increasing willingness to save by individuals due to longer life expectancy. The decrease of the aggregate saving rate as individuals retire has an upward impact which is never strong enough. Mitigating factors are: higher substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, reforms aiming at increasing the relative productivity of older cohorts, the participation rate and the retirement age. The simulated path of the natural real interest rate is consistent with recent econometric estimates: an upward trend in the 70s and 80s and a prolonged decline afterward. JEL Classification: E17, E21, E43, E52, J11
    Keywords: aging, demographic transition, euro area, natural interest rate, secular stagnation
    Date: 2019–03
  10. By: Antonio Estache; Beni Kouevi Gath
    Abstract: This paper assesses how corporate income tax rate (CITR) changes and the aggregate unemployment rate are related in the OECD. The analysis is based on a sample of 20 OECD countries over the period 1999 to 2014. In contrast to earlier cross-country research, we account explicitly for differences in labor market policies and institutions. The main result is that, on average, a CITR cut is associated with an increase in the unemployment rate. This implies that, for this sample, the substitution effect of the tax rate cut on jobs dominates its output effect. This is consistent with a significant switch to less labor intensive capital which is not compensated by a new demand induced by the output effect of the tax cut. Labor market and structural characteristics differences across countries explain differences in the relative strength of these two effects. We also find that differences in reactions to the 2008 Subprime crisis also impacted the relative size of these two effects.
    Keywords: corporate taxation ,fiscal policies
    Date: 2019–03
  11. By: Hochmuth, Brigitte (University of Erlangen-Nuremberg); Kohlbrecher, Britta (University of Erlangen-Nuremberg); Merkl, Christian (University of Erlangen-Nuremberg); Gartner, Hermann (Institute for Employment Research (IAB), Nuremberg)
    Abstract: This paper proposes a new approach to evaluate the macroeconomic effects of the Hartz IV reform in Germany, which reduced the generosity of long-term unemployment benefits. We use a model with different unemployment durations, where the reform initiates both a partial effect and an equilibrium effect. The relative importance of these two effects and the size of the partial effect are estimated based on the IAB Job Vacancy Survey. Our novel methodology provides a solution for the existing disagreement in the macroeconomic literature on the unemployment effects of Hartz IV. We find that Hartz IV was a major driver for the decline of Germany's unemployment and that partial and equilibrium effect where of equal importance. We thereby contribute to the literature on partial and equilibrium effects of unemployment benefit changes. In addition, we are the first to provide direct empirical evidence on labour selection, which can be interpreted as one dimension of recruiting intensity.
    Keywords: unemployment benefits reform, search and matching, Hartz reforms
    JEL: E24 E00 E60
    Date: 2019–03

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