nep-eec New Economics Papers
on European Economics
Issue of 2019‒04‒22
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Do monetary unions dream of structural reforms? By Loewald, Christopher; Wörgötter, Andreas
  2. The benefits and costs of adjusting bank capitalisation: evidence from euro area countries By Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
  3. The potential economic impact of Brexit on Denmark By Donal Smith; Mikkel Hermansen; Sune Malthe-Thagaard
  4. Impact of targeted credit easing by the ECB. Bank-level evidence By Joost Bats; Tom Hudepohl
  5. When are Google data useful to nowcast GDP? An approach via pre-selection and shrinkage By Laurent Ferrara; Anna Simoni
  6. The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict By Wilko Bolt; Kostas Mavromatis; Sweder van Wijnbergen
  7. What Option Prices tell us about the ECBs Unconventional Monetary Policies By Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
  8. The CSPP at work - yield heterogeneity and the portfolio rebalancing channel By Zaghini, Andrea
  9. Post-Brexit Realism and international law: renegotiating a bad Withdrawal Agreement By Minford, Patrick
  10. When Governments Promise to Prioritize Public Debt: Do Markets Care? By Mitu Gulati; Ugo Panizza; W. Mark C. Weidemaier; Gracie Willingham
  11. EU28 Capital Market Perspectives of a Hard BREXIT: Theory, Empirical Findings and Policy Options By Paul J.J. Welfens; Fabian Baier; Samir Kadiric; Arthur Korus; Tian Xiong
  12. The effect of TLTRO-II on bank lending By Laine, Olli-Matti
  13. Immigration and electoral support for the far-left and the far-right By Anthony Edo; Yvonne Giesing; Jonathan Öztunc; Panu Poutvaara
  14. Europe in the midst of China-US strategic competition: What are the European Union's options? By Alicia García-Herrero
  15. Taxation in the digital economy: Recent policy developments and the question of value creation By Olbert, Marcel; Spengel, Christoph

  1. By: Loewald, Christopher; Wörgötter, Andreas
    Abstract: When the principal decisions for the European Monetary Union (EMU) were made it was acknowledged that it would not be an optimal currency area (OCA). Potential trouble was assumed away as asymmetric shocks were expected to fade, while rising productivity enhanced the resilience of EMU member economies. We argue however that for less export-focused member countries the loss of the exchange rate mechanism has become an especially debilitating constraint limiting recovery from recessions. The common monetary policy helps to absorb some financial shocks but cannot address structural issues in financial, product or labour markets. Fiscal policy too is constrained. It has little positive short-run impact on competitiveness and works as a shock absorber only if fiscal balances are sustainable. Without nominal exchange rate adjustments, only internal devaluation corrects an overvalued real exchange rate, either through wage restraint or productivity increases. Co-ordinated sets of prioritised structural policies could push the real exchange rate in the right direction and generate cross-border synergies, reducing short run costs. For example, Germany should lower its value added tax (VAT) to provide room for more imports, while Italy and other deficit economies could strengthen work incentives to reduce labour shortages in the export sector.
    Date: 2019
  2. By: Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
    Abstract: The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks’ capitalisation. On this basis, we run a fully-fledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity. JEL Classification: E51, G21, G28
    Keywords: banking system resilience, capital regulation, cost-benefit analysis, FAVAR
    Date: 2019–04
  3. By: Donal Smith; Mikkel Hermansen; Sune Malthe-Thagaard
    Abstract: This paper provides estimates of the potential trade effects on exports and production at the sectoral level as well as GDP in Denmark of the exit of the United Kingdom (UK) from the European Union (EU). Owing to the high uncertainty regarding the final Brexit deal between the EU and the UK, this paper assumes a worst case outcome where trade relations are governed by World Trade Organization (WTO) most favoured nation (MFN) rules. In doing so, it provides something close to an upper bound estimate of the potential negative economic impact. Any trade agreement that would result in a closer relationship between the United Kingdom and the EU than WTO rules reduces the negative impact.Under the worst case illustrative scenario assumed in this paper, Danish exports to the UK fall by 17%, total exports and GDP decline by 1.3% in the medium term. This effect is from the trade channel absent any change in foreign direct investment (FDI) or productivity. The fall in exports is concentrated in the Danish agri-food and machinery and equipment sectors, which account for half of the export reduction. Exports to the UK of agri-food and machinery and equipment fall by 24% and 17% respectively. Smaller manufacturing sectors such as wood and leather products, metals and textiles see falls of over 20% in their exports to the UK. The chemicals sector, which includes pharmaceuticals, comprises 9.5% of Danish exports to the UK and would experience an 18% reduction in its exports to the UK.Seven Danish sectors experience production declines of over 2.5% in the scenario. The largest decline is in the meat products sectors (7%), metals (3%), material manufacturing (2.3%) and other agri-food sectors (2.2%). These sectors would also see the largest declines in labour demand.
    Keywords: Brexit, computable general equilibrium model, Denmark, European Union, international trade, METRO model, sectoral economic effects
    JEL: C68 C10 F13 F14
    Date: 2019–04–23
  4. By: Joost Bats; Tom Hudepohl
    Abstract: The interest rate in the second series of ECB targeted longer-term refinancing operations is conditional on a participant-specific lending benchmark. The restrictiveness of this benchmark varies between banks. We employ fixed effects estimations on a unique micro-dataset and investigate the relationship between the benchmark restrictiveness and net bank lending. We find that a more restrictive benchmark is associated with more total net lending and net lending to non-financial corporates by relatively large banks. Banks that are relatively large and face the most restrictive benchmark increase their lending to the real economy with 9 to 17 percent. We find no significant effects on net lending by relatively small banks. Furthermore, the restrictiveness of the benchmark does not affect net lending to households. Our findings suggest that the design of targeted lending benchmarks influences bank credit flows and that a more binding benchmark would have been even more effective in stimulating bank lending.
    Keywords: central bank; monetary policy; refinancing operations; credit easing; bank credit
    JEL: C23 E51 E58 G21
    Date: 2019–04
  5. By: Laurent Ferrara; Anna Simoni
    Abstract: Nowcasting GDP growth is extremely useful for policy-makers to assess macroeconomic conditions in real-time. In this paper, we aim at nowcasting euro area GDP with a large database of Google search data. Our objective is to check whether this specific type of information can be useful to increase GDP nowcasting accuracy, and when, once we control for official variables. In this respect, we estimate shrunk bridge regressions that integrate Google data optimally screened through a targeting method, and we empirically show that this approach provides some gain in pseudo-real-time nowcasting of euro area GDP quarterly growth. Especially, we get that Google data bring useful information for GDP nowcasting for the four first weeks of the quarter when macroeconomic information is lacking. However, as soon as official data become available, their relative nowcasting power vanishes. In addition, a true real-time analysis confirms that Google data constitute a reliable alternative when official data are lacking.
    Keywords: Nowcasting, Big data, Sure Independence Screening, Ridge Regularization.
    JEL: C53 E37
    Date: 2019
  6. By: Wilko Bolt (The Nederlandsche Bank, Vrije Universiteit); Kostas Mavromatis (The Nederlandsche Bank, University of Amsterdam); Sweder van Wijnbergen (The Nederlandsche Bank, University of Amsterdam)
    Abstract: We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.
    Keywords: Trade Policy, Exchange Rates, Trade Diversion, Local Currency Pricing
    JEL: E32 F30 H22
  7. By: Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
    Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not instantly move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
    Keywords: Quantitative Easing; Unconventional Monetary Policies; Exchange Rate Crash Risk; risk reversals; mixed diffusion jump risk models
    JEL: E44 E52 E58 E65 G12 G13 G14
    Date: 2019–04
  8. By: Zaghini, Andrea
    Abstract: We assess the impact of the corporate sector purchase programme (CSPP), the corporate arm of the ECB's quantitative easing, over its first year of activity (June 2016 - June 2017). Focusing on the primary bond market, we find evidence of a significant impact of the CSPP on yield spreads, both directly on purchased and targeted bonds and indirectly on all other bonds. The magnitude and the timing of the changes in yield spreads, coupled with the evolution of bond placements, are fully consistent with the proper unfolding the portfolio rebalancing channel. JEL Classification: G15, G32, G38
    Keywords: bond yields, market segmentation., Quantitative easing, unconventional monetary policy
    Date: 2019–04
  9. By: Minford, Patrick (Cardiff Business School)
    Abstract: Some pro-Brexit MPs will not vote for the government's proposed Withdrawal Agreement because of its fine print: they think it will be written in indelible tablets of law that we can never change. But they forget that sovereign states will not indefinitely stay in treaties that do not suit them, if no one can force them to, as in general no one can, unlike in national law where the state can force us. That is just the plain economics of national self-interest, as deployed in game theory studies of international treaties. Our Agreement with the EU if we sign it will not last for long if it stops us from pursuing our interests in trade and regulation: no one, certainly not the EU, can force us to stay with it. It has been negotiated like a hostile divorce because the EU wanted to prove it does not pay to leave. But once the divorce has happened, it will be a new situation where, as with ex-partners in a divorce, they will want to live harmoniously with us in the long term. There will be sensible diplomacy so that we can accommodate each other's interests, in a process of adaptation. After leaving, we can push ahead with good policies on trade, regulation and migration that the government we vote for will pursue; the EU will cooperate as it will not wish us to move to default WTO rules.
    Date: 2019–04
  10. By: Mitu Gulati (Duke University Law School); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva); W. Mark C. Weidemaier (University of North Carolina School of Law); Gracie Willingham (Duke University Law School)
    Abstract: During the European sovereign debt crisis of 2011-13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there was a shortage of funds, bondholders would be paid first. In this article, we analyze the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a widely-touted reform at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the U.S. Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.
    Keywords: Sovereign Debt, Debt Sustainability, Sovereign Spreads
    JEL: E62 H62 H63 P16
    Date: 2019–04–15
  11. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Fabian Baier (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Samir Kadiric (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Arthur Korus (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Tian Xiong (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: Key aspects covered refer to the cost of leaving the EU and in particular the implications for corporate bond risk premiums in the UK and the Eurozone: The gap between the interest rates of corporate bonds and government bonds could increase in the UK and Eurozone, respectively, as a result of BREXIT where the 2016 BREXIT referendum itself is considered to be a first BREXIT event (see the empirical findings), followed by the main BREXIT event, namely the day of officially leaving the EU - possibly as a No-deal BREXIT. It is as yet not clear what type of BREXIT will be implemented – hard versus soft – and it is also unclear what type of free trade agreement the EU and the UK could accomplish post-BREXIT. However, it is obviously necessary to carefully consider the background of the BREXIT dynamics and to then refer to various versions of BREXIT if one is to understand the inherent politico-economic dynamics of BREXIT – with a No-deal case representing an analytical benchmark which most politicians in the British Parliament obviously would want to avoid; a simple way to indeed avoid this case, with obvious high costs for the British economy, is not easy to discern as the UK’s political system is fractured. If the safe-haven status of the UK should be impaired by BREXIT, the rise of government bond interest rates by 0.3% would stand for the same burden as the net UK contribution to the EU.
    Keywords: BREXIT, capital markets, credit spreads, FDI, growth
    JEL: F02 F4 F21 G1 G2
    Date: 2019–03
  12. By: Laine, Olli-Matti
    Abstract: This study applies a difference-in-differences approach to estimate the effect of the European Central Bank’s second series of targeted longer-term refinancing operations (TLTRO-II) on bank lending. Effects on corporate loans, loans for house purchase and loans for consumption are analysed separately. The results indicate that TLTRO-II increased lending to non-financial corporations. The cumulative effect of TLTRO-II on participating banks’ corporate lending is estimated to be about 30 per cent. The estimated effects for house purchase and consumption loans are positive, but statistically insignificant.
    JEL: E44 E51 E52 G21
    Date: 2019–04–08
  13. By: Anthony Edo; Yvonne Giesing; Jonathan Öztunc; Panu Poutvaara
    Abstract: Immigration is one of the most divisive political issues in the United States, the United Kingdom, France and several other Western countries. We estimate the impact of immigration on voting for far-left and far-right candidates in France, using panel data on presidential elections from 1988 to 2017. To derive causal estimates, we instrument more recent immigration flows by settlement patterns in 1968. We find that immigration increases support for far-right candidates. This is driven by low-educated immigrants from non-Western countries. We also find that immigration has a weak negative effect on support for far-left candidates, which could be explained by a reduced support for redistribution. We corroborate our analysis with a multinomial choice analysis using survey data.
    Date: 2019
  14. By: Alicia García-Herrero
    Abstract: With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question - how to position itself in the competition. This paper reviews the impact of the US-led trade war against China and its immediate consequences for China, the US and the EU. Although protectionism can never be growth enhancing, European companies could see gains if the trade confrontation between China and the US ends up reducing their bilateral trade to the benefit of European companies that export to China. This is because US exports to China are concentrated in sectors that are also key for the EU’s exports to China, with the exception of energy and agricultural products. However, a solution to the US-China trade conflict that artificially increases Chinese imports from the US can only hurt European exporters. A much broader and structural deal which pushes China to reform and open up would not only be beneficial for the US but also for the EU and the rest of the world. Against this background, this paper reviews the EU’s options in the new world of strategic confrontation between China and the US. The most obvious option would be to continue to safeguard multilateralism, but the EU should not be naïve in remaining alone, among major economic blocs, pushing for such an option. The second option would be for the EU to become more reliant on the Transatlantic Alliance. The last option would be for the EU to move its centre of gravity towards China, or at least to remain neutral between the US and China. While it might seem unrealistic today, this last option might need to be explored if the US continues to move away from multilateralism and, to some degree, from the Transatlantic Alliance. For the time being, the European Commission seems to have stepped up its thinking about the necessary conditions for stronger economic cooperation with China, which is already an important step in this direction.
    Date: 2019–04
  15. By: Olbert, Marcel; Spengel, Christoph
    Abstract: The paper reviews the evidence on the challenges of digitalization for direct (corporate profit) and indirect (consumption) taxation. Based on both anecdotal and empirical evidence, we evaluate ongoing developments at the OECD and European Union level and argue that there is no justification for introducing a new tax order for digital businesses. In particular, the significant digital presence and the digital services tax as put forward by the European Commission will most likely distort corporate decisions and spur tax competition. To contribute to the development of tax rules in line with value creation as the gold standard for profit taxation the paper discusses data as a "new" value-driving asset in the digital economy. It draws on insights from interdisciplinary research to highlight that the value of data emerges through proprietary activities conducted within businesses. We ultimately discuss how existing transfer pricing solutions can be adapted to business models employing data mining.
    Keywords: Digital Economy,Corporate Taxation,Business Model Analysis,Data Mining,Tax Planning
    JEL: H20 H25 H26 L21 L86 M14
    Date: 2019

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