nep-eec New Economics Papers
on European Economics
Issue of 2019‒04‒29
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. QE in the euro area: Has the PSPP benefited peripheral bonds? By Belke, Ansgar; Gros, Daniel
  2. Does the lack of financial stability impair the transmission of monetary policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  3. Investment, autonomous demand and long run capacity utilization: An empirical test for the Euro Area By Gallo, Ettore
  4. Reducing tax compliance costs through corporate tax base harmonisation in the European Union By Salvador Barrios; Diego d'Andria; Maria Gesualdo
  5. Financialization and demand regimes in advanced economies By Engelbert Stockhammer; Karsten Kohler
  6. The Swedish Fiscal Framework – The Most Successful One in the EU? By Andersson, Fredrik N. G.; Jonung, Lars
  7. EU exports to the EU: Effects on employment and income By Inaki Arto; Jose M. Rueda-Cantuche; Ignacio Cazcarro; Antonio F. Amores; Erik Dietzenbacher; M. Victoria Roman
  8. Macroeconomic Imbalance Procedure, economic reforms and policy progress in the European Union By Jean-Charles Bricongne; Nuria Mata Garcia; Alessandro Turrini
  9. Fear, deposit insurance schemes, and deposit reallocation in the German banking system By Fecht, Falko; Thum, Stefan; Weber, Patrick
  10. Aggregate and Disaggregate Natural Resources Agglomeration and Foreign Direct Investment in France By Audi, Marc; Ali, Amjad
  11. Labor market reforms, precautionary savings, and global imbalances By Hochmuth, Brigitte; Moyen, Stephane; Stähler, Nikolai

  1. By: Belke, Ansgar; Gros, Daniel
    Abstract: The asset purchase programme of the euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB's Public Sector Purchase Programme (PSPP) involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a national central bank of the bonds of their own sovereign should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when QE in the euro area was announced. However, the initial fall in risk premiums may have been due to expectations of the bond purchases proving effective in lowering risk-free rates. When these expectations were disappointed, risk premiums returned to their initial level. Formal statistical tests confirm that indeed risk premiums on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premiums. There is thus no reason to consider the impact effect to have been permanent.
    Keywords: European Central Bank,quantitative easing,unconventional monetary policies,spreads,structural breaks,time series econometrics
    JEL: E43 E58 G12 G15
    Date: 2019
  2. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks' capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.
    Keywords: Central bank liquidity,Monetary policy transmission,Corporate deposits,Financial crisis,Lender of last resort,Banking crisis,Loans,Real effects
    JEL: E43 E58 G01 G21
    Date: 2019
  3. By: Gallo, Ettore
    Abstract: In recent years, the role attached to the autonomous components of aggregate demand has attracted rising attention, as testified by the development of the Sraffian Supermulti plier model (SSM) and the attempts to include autonomous demand in the Neo-Kaleckian model. This paper reviews and empirically tests the validity and the policy conclusions of the two models in the Euro Area. First, we theoretically assess whether the SSM may con stitute a complex variant of the Neo-Kaleckian model. In this sense, it is shown that results compatible with the SSM can be obtained by implementing a set of mechanisms in a modified Neo-Kaleckian model, leading to the convergence towards a desired rate of utilization. Furthermore, the chief diffierence between the models is recognized to be the role attached to the rate of capacity utilization in the long run. Second, the paper empirically tests the main implications of the models in the Euro Area, based on Eurostat data. In particular, the discussion outlines the short and long-run relation between autonomous demand and output, by testing both the cointegration and the direction of causality between the two with a VECM model. Moreover, the role accounted by both theories to the actual rate of capacity utilization and its discrepancies from the normal rate is empirically assessed, through a time-series estimation of the Sraffian and Neo-Kaleckian investment functions. While confirming the theoretical relation between autonomous demand and output in the long run, the results show that the dynamics of the rate of capacity utilization still plays a key role in the short-run adjustment mechanism - despite its stationary behaviour in the long term. Therefore, admitting that Keynesian results may hold even after the traverse, our work suggests to be Kaleckian in the short run and Sraffian in the long run.
    Keywords: distribution,effective demand,Eurozone,growth,Neo-Kaleckian,Sraffian,Supermultiplier
    JEL: B51 E11 E12 O41 O47 O52
    Date: 2019
  4. By: Salvador Barrios (European Commission - JRC); Diego d'Andria (European Commission - JRC); Maria Gesualdo (European Commission - JRC)
    Abstract: The reform proposal of the European Commission for a Common Consolidated Corporate Tax Base, the so-called CCCTB, is expected to significantly reduce the cost of doing business by lowering tax compliance costs for cross border operations within the European Union. However, to date the scarcity of comparable estimates on tax compliance costs has limited the assessment of such reduction. We exploit recently released and unique survey data designed to provide comparable information on corporate tax compliance costs in order to assess the impact of the CCCTB, using a general equilibrium modelling approach. Our results suggest that the reduction in tax compliance costs implied by the CCCTB would be associated with greater economic efficiency, including increases in both welfare and GDP. Member States resulting with the lowest compliance costs before the reform and having large inward foreign investment stock would benefit more from the CCCTB. Cross-border business operations would also benefit more from the CCCTB compared to domestic ones. The impact of the CCCTB on non-EU countries such as the US and Japan would be limited.
    Keywords: CCCTB, tax compliance costs, European Union
    JEL: H20 H30 C68
    Date: 2019–04
  5. By: Engelbert Stockhammer; Karsten Kohler
    Abstract: In this article, we analyze the implications of financialization for domestic demand formation by linking the concept of financialization to the post-Keynesian analysis of demand regimes. We examine how the financialization of households in advanced economies gave rise to distinct but interdependent demand regimes. In the Anglo-Saxon and southern European countries, financialization in the form of property price inflation and rising household debt contributed to the development of a debt-driven demand regime with large current account deficits. Economic development in eastern Europe was shaped by catching-up through foreign direct investment from northern Europe and accompanied by worsening current account positions. Northern Europe, in contrast, relied on an export-driven demand regime with a weaker role for financialization. The export-driven demand regime relies on the financialization of southern Europe and the Anglo-Saxon countries, which helped create export demand for northern Europe. We argue that this constellation of demand regimes gives rise to divergent economic performance and macroeconomic instability. While with deleveraging the growth effects of the debt-driven model have gone into reverse, the fundamental configuration has not changed since the crisis.
    Keywords: Financialization, demand regimes, post-Keynesian economics
    JEL: E02 E60
    Date: 2019–04
  6. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper discusses the history and future of the Swedish fiscal framework. First, we claim that the fiscal framework has contributed to a sharp decline in the debt-to-GDP ratio, from one of the highest to one of the lowest in the European Union. Next, we focus on the future. Despite its success, we argue that the framework is unsustainable. Running large surpluses over the long run is not a steady-state solution. We recommend two changes to the framework. First, that the public pension system is excluded, and second that the Swedish fiscal authorities shift attention from maintaining a budget surplus of 1/3 percent of GDP over the business cycle to sustaining a stable debt-to-GDP ratio of 25 percent of GDP +/- 5 percentage points. A debt anchor at this level will provide sufficient insurance in case of a future major economic crisis judging from recent cross-country evidence. In addition, a debt anchor around 25 percent of GDP would contribute to political stability in time of crises. In a world, where populism and austerity fatigue are rampant, we stress the importance of a fiscal framework allowing successful consumption and tax smoothing in case of major negative shocks to the fiscal space. We conclude with a set of recommendations for the fiscal governance of the EU.
    Keywords: Fiscal policy; fiscal framework; fiscal policy council; financial crisis; debt crisis; consumption smoothing; Sweden; EU
    JEL: E61 E62 E63 G02 H12 H30 N14 O52
    Date: 2019–04–10
  7. By: Inaki Arto (Basque Centre for Climate Change – BC3); Jose M. Rueda-Cantuche (European Commission – JRC); Ignacio Cazcarro (Basque Centre for Climate Change – BC3); Antonio F. Amores (European Commission – JRC); Erik Dietzenbacher (University of Groningen); M. Victoria Roman (European Commission – JRC)
    Abstract: The European Commission identified trade policy as a core component of the European Union's 2020 Strategy. The fast changing global economy, characterised by the dynamic creation of business opportunities and increasingly complex production chains, means that it is now even more important to fully understand how trade flows affect employment in the EU economy. Gathering comprehensive, reliable and comparable information on this is crucial to support evidence-based policymaking. Guided by that objective, the European Commission's Joint Research Centre (JRC) produced this publication. It aims to be a valuable tool for EU policymakers covering trade policy, industrial policy, employment policy and the European Semester. Following up Arto et al. (2015), this report features a series of indicators to illustrate in detail the relationship between international trade, income and employment for the EU as a whole and for each EU Member State using the World Input-Output Database (WIOD), 2016 release (Timmer et al., 2015, 2016), as the main data source. This information has been complemented with labour data by age, skill and gender from other sources such as EUKLEMS. All the indicators relate to the EU exports of goods and services consumed in another EU country or sold as intermediate to another EU country. Effects of intra-EU trade supplying inputs to other EU countries to produce exports of goods and services sold to non-EU countries are not reported here but in other JRC publications: "EU exports to the world: Effects on Employment" (Arto et al., 2018a) and "EU exports to the world: Effects on Income" (Arto et al., 2018b). Most indicators are available as off 2000 but, due to data constraints, the indicators on employment split by skill, gender and age are only available from 2008 to 2014. The geographical breakdown of the data includes the 28 EU Member States. The information presented in this pocketbook is complemented with an electronic version allowing downloads of the tables with the complete time series (2000-2014).
    Keywords: Employment, Income, Exports, European Union
    JEL: C67
    Date: 2018–12
  8. By: Jean-Charles Bricongne (Université François Rabelais Tours); Nuria Mata Garcia; Alessandro Turrini
    Abstract: Every year, in the macroeconomic imbalances procedure (MIP), the European Commission examines the economic situation of member States, decides whether to launch an in-depth-review (IDR) and classifies countries into several categories, ranking from "no imbalances" to "excessive imbalances". The European Commission then releases some "specific country recommendations" (CSRs), detailing the economic measures to take to address the challenges and the imbalances. This procedure has few equivalents in the world and, in that context, the question of the extent to which the pressure stemming from the MIP procedure can incite member States to implement reforms can be raised. It is found that the pressure induced by the MIP classification is associated with more progress, whatever the regression used and whatever the controls. Besides, if control variables' coefficients are not always significant depending on the regressions, their signs are as expected: difficult or politically/socially sensitive recommendations are associated with less progress, especially in the area of structural reforms and public finances. As regards political factors, progress is relatively less important when the mandates are getting close to their ends than for newly elected governments.
    Keywords: structural reforms; macroeconomic imbalance procedure; macroeconomic surveillance
    Date: 2019–04
  9. By: Fecht, Falko; Thum, Stefan; Weber, Patrick
    Abstract: Recent regulatory initiatives such as the European Deposit Insurance Scheme propose a change in the coverage and backing of deposit insurances. An assessment of these proposals requires a thorough understanding of what drives depositors' withdrawal decisions. We show that Google searches for 'deposit insurance' and related strings reflect depositors' fears and help to predict deposit shifts in the German banking sector from private banks to fully guaranteed public banks. After the introduction of blanket state guarantees for all deposits in the German banking system this fear driven reallocation of deposits stopped. Our findings highlight that a heterogeneous insurance of deposits can lead to a sudden, fear induced reallocation of deposits endangering the stability of the banking sector even in absence of redenomination risks.
    Keywords: Depositor expectations,Google,Deposit insurance,Competition for depositors,Bank runs
    JEL: G01 G10 G20
    Date: 2019
  10. By: Audi, Marc; Ali, Amjad
    Abstract: The inflow of foreign direct investment shows the economic and political strength of a country (Bevan & Estrin, 2004). Resources agglomeration and foreign direct investment have a theoretical and empirical relationship (Carlton, 1983; Hansen, 1987; Krugman, 1991; Wheeler and Mody, 1992; Friedman et al., 1992; Head et al., 1995; Henderson and Kuncoro, 1996; Head and Ries, 1996; Devereux and Griffith, 1998; Head et al.,1999; Guimaraes et al., 2000). This paper has examined the impact of aggregate and disaggregate natural resources agglomeration on foreign direct investment in the case of France from 1989 to 2012. Seven different model specifications are used for empirical analysis. The inflow of foreign direct investment from Greece, Australia, Austria, Germany, Canada, Finland, Ireland, Hungary, Israel, Japan, Italy, Republic of South Korea, Switzerland, Norway, Netherlands, Poland, Spain, Portugal, Sweden, Turkey, United States, Mexico, Korea and United Kingdom in France is taken as the dependent variable. Total natural resources agglomeration, population density, trade openness, secondary education, taxes, inflation rate, primary education, agriculture land agglomeration, forest agglomeration, oilproduction agglomeration, mineral production agglomeration and natural gas production agglomeration are selected as explanatory variables. The results show that aggregate and disaggregate natural resources agglomeration are important indicators of foreign direct investment. The results show that the population density is a key indicator of foreign direct investment, the current population growth of France and many developed countries is below the replacement rate. Agriculture land agglomeration, oil production agglomeration and mineral production agglomeration are the inputs of many economic activities. This shows that for higher amount of foreign direct investment, natural resources agglomeration must be encouraged.
    Keywords: natural resources agglomeration, foreign direct investment
    JEL: F21 N5
    Date: 2019–02
  11. By: Hochmuth, Brigitte; Moyen, Stephane; Stähler, Nikolai
    Abstract: How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account.
    Keywords: unemployment benefits reform,current account imbalances,precautionary savings,Hartz reform
    JEL: E21 E24 F16 F41
    Date: 2019

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