nep-eec New Economics Papers
on European Economics
Issue of 2019‒05‒20
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Efficiency of the European banks in the aftermath of the financial crisis: A panel stochastic frontier approach By Cândida Ferreira
  2. GDP-Employment decoupling and the slow-down of productivity growth in Germany By Klinger, Sabine; Weber, Enzo
  3. The North-South Divide, the Euro and the World By Konstantinos Chisiridis; Kostas Mouratidis; Theodore Panagiotidis
  4. The corporate saving glut and the current account in Germany By Klug, Thorsten; Mayer, Eric; Schuler, Tobias
  5. The impact of forecast errors on fiscal planning and debt accumulation By Ademmer, Martin; Boysen-Hogrefe, Jens
  6. The Shape of Eurozone’s Uncertainty: Its Impact and Predictive Value on GDP By Ralf Fendel; Nicola Mai; Oliver Mohr
  7. The Maturity of Sovereign Debt Issuance in the Euro Area By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
  8. Job automation risk, economic structure and trade: a European perspective By Foster-McGregor, Neil; Nomaler, Önder; Verspagen, Bart
  9. The European venture capital landscape: an EIF perspective. Volume V: The economic impact of VC investments supported by the EIF By Pavlova, Elitsa; Signore, Simone
  10. Migration Fear, Uncertainty, and Macroeconomic Dynamics By Michael Donadelli; Luca Gerotto; Marcella Lucchetta; Daniela Arzu
  11. The Financial Instability Hypothesis and the Financial Crisis in Eastern European Emerging Economies By Grytten, Ola Honningdal; Koilo, Viktoriia
  12. Price-cost margin and bargaining power in the European Union By Soares, Ana Cristina
  13. The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden By Ankargren, Sebastian; Shahnazarian, Hovick
  14. Do information contagion and business model similarities explain bank credit risk commonalities? By Wang, Dieter; van Lelyveld, Iman; Schaumburg, Julia
  15. Shocking Interest Rate Floors By Fabio Canetg, Daniel Kaufmann
  16. Fiscal Austerity and Migration: A Missing Link By Guilherme Bandeira; Jordi Caballe; Eugenia Vella
  17. Does fiscal consolidation hurt economic growth? Empirical evidence from Spanish regions By Lago Peñas, Santiago; Vaquero-Garcia, Alberto; Sanchez-Fernandez, Patricio; Lopez-Bermudez, Beatriz

  1. By: Cândida Ferreira
    Abstract: Using panel estimates and Stochastic Frontier Analysis this paper aims to contribute to the analysis of bank efficiency of the European banks in the aftermath of the international financial crisis and the sovereign crisis that seriously affected many EU countries. It also considershypothetical scenarios of exit from the EU of some of the particularly relevant member-states, including the Brexit scenario. The results obtained very clearly demonstrate the existence of statistically significant technical inefficiencies in all considered scenarios. Nevertheless, the results reveal that the exclusion of the Italian banks and of the UK banks from our estimates would be more beneficial to the decrease of the banks’ cost inefficiencies than the exclusion of the French and the German banks. Moreover, the worst scenario in terms of the decrease of the EU banks’ cost inefficiencies would be the exclusion of the banks from the five EU countries that were deeply affected by the international financial and sovereign crises and were obliged to restructure their bank systems, that is, Cyprus, Greece, Ireland, Portugal and Spain.
    Keywords: Bank efficiency; Stochastic Frontier Analysis; EU banking sector; Brexit
    JEL: C33 D24 F36 G21
    Date: 2019–05
  2. By: Klinger, Sabine (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weber, Enzo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper investigates the time-varying relationship between German output and employment growth, in particular their decoupling in recent years. We estimate a correlated unobserved components model that allows for persistent and cyclical time variation in the employment-GDP linkage as well as an additional employment component beyond the one linked to GDP. Controlling for the latter yields a more precise classification of what is a jobless recovery or a labour hoarding recession. We find that productivity growth has slowed down since the Great Recession because the co-movement of employment and GDP has loosened while the co-movement with other variables than GDP has become tighter. The decoupling is of permanent nature. The development of the time-varying parameter goes hand in hand with the change of the sectoral composition of the economy, especially with the rise of the service sector. Beyond that, recent employment growth would not have been that strong if labour market tightness had not been that high and - to some minor extent - if immigration, wage moderation and working time reductions had not taken place." (Author's abstract, IAB-Doku) ((en))
    Date: 2019–04–25
  3. By: Konstantinos Chisiridis (Department of Economics, University of Macedonia); Kostas Mouratidis; Theodore Panagiotidis
    Abstract: The European north-south divide has been an issue of a long-standing debate. We employ a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro-area framework. The aim is to assess the propagation mechanisms of real shocks, focusing on the interconnections among the north euro area and the south euro area. We incorporate theory-based long-run restrictions and examine the effects of (i) non-export real output shocks, (ii) expansionary shocks and (iii) real exchange rate shocks. The results provide support for symmetric adjustment in the euro area; an expansionary policy of the north euro area and increased competitiveness in the south euro area can alleviate trade imbalances of the debtor euro area economies. From the south euro area perspective, internal devaluation is the most beneficial policy. North euro area and U.S. origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia while the strong linkage between trade flows within the euro area is confirmed.
    Keywords: North-South Euro Area Trade Imbalances, Global Trade Imbalances, International Linkages, Global VAR, Spillover Effects
    JEL: C33 E27 F14
    Date: 2018–11
  4. By: Klug, Thorsten; Mayer, Eric; Schuler, Tobias
    Abstract: We investigate for the case of Germany the positive correlation between the corporate saving glut in the non-financial corporate sector and the current account surplus from a capital account perspective. By employing sign restrictions our findings suggest that mostly labor market, world demand and financial friction shocks account for the joint dynamics of excess corporate saving and the current account surplus. Household saving shocks, in contrast, cannot explain the correlation. We conclude that the corporate saving glut, explained through these factors, is the main driver of the current account surplus.
    Keywords: current account,corporate saving,macro shocks
    JEL: E32 F32
    Date: 2019
  5. By: Ademmer, Martin; Boysen-Hogrefe, Jens
    Abstract: We investigate the impact of errors in medium run tax revenue forecasts on the final budget balance. Our analysis is based on fiscal data for the entirety of German states and takes advantage of revenue forecasts and respective errors that can be considered as exogenously given in the budgeting process. We find that forecast errors at various forecast horizons translate considerably into the final budget balance, indicating that expenditure plans get only marginally adjusted when revenue forecasts get revised. Consequently, the accuracy of medium run forecasts considerably affects the sustainability of public finances. Our calculations suggest that a significant share of total debt of German states results from revenue forecasts that were too optimistic.
    Keywords: fiscal policy,fiscal planning,medium run forecasting,budget balance,public debt
    JEL: E62 H61 H68
    Date: 2019
  6. By: Ralf Fendel; Nicola Mai; Oliver Mohr
    Abstract: This paper examines the role of uncertainty in the context of the business cycle in the Eurozone. To gain a more granular perspective on uncertainty, the paper decomposes uncertainty along two dimensions: First, we construct the four different moments of uncertainty, including the point estimate, the standard deviation, the skewness and the kurtosis. The second dimension of uncertainty spans along three distinct groups of economic agents, including consumers, corporates and financial markets. Based on this taxonomy, we construct uncertainty indices and assess the impact on real GDP via impulse response functions and further investigate their informational value in rolling out-of-sample GDP forecasts. The analysis lends evidence to the hypothesis that higher uncertainty expressed through the point estimate, a larger standard deviation among confidence estimates, positive skewness and a higher kurtosis are all negatively correlated with the business cycle. The impulse response functions reveal that in particular the first and the second moment of uncertainty cause a permanent effect on GDP with an initial decline and a subsequent overshoot. We find uncertainty in the corporate sector to be the main driver behind this observation, followed by financial markets’ uncertainty whose initial effect on GDP is comparable but receding much faster. While the first two moments of uncertainty improve GDP forecasts significantly, both the skewness and the kurtosis do not augment the forecast quality any further.
    Keywords: Uncertainty, Eurozone, Business cycle, GDP forecast, VAR,
    JEL: D8 E23 E27 E32 E37
    Date: 2019–05–10
  7. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
    Abstract: We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off preference for liquidity services of short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theory. A forecast error variance decomposition suggests that changes in non-repayment risk as captured by credit default spreads are the most important source of shocks.
    Keywords: euro-area public debt auctions; expected repayment probability; liquidity services of short debt; Maturity; risk aversion; yield curve
    JEL: E62 G11 G12 G18
    Date: 2019–05
  8. By: Foster-McGregor, Neil (UNU-MERIT); Nomaler, Önder (UNU-MERIT); Verspagen, Bart (UNU-MERIT)
    Abstract: Recent studies report that technological developments in machine learning and artificial intelligence present a significant risk to jobs in advanced countries. We re-estimate automation risk at the job level, finding sectoral employment structure to be key in determining automation risk at the country level. At the country level, we find a negative relationship between automation risk and labour productivity. We then analyse the role of trade as a factor leading to structural changes and consider the effect of trade on aggregate automation risk by comparing automation risk between a hypothetical autarky and the actual situation. Results indicate that trade increases automation risk in Europe, although moderately so. European countries with high labour productivity see automation risk increase due to trade, with trade between European and non-European nations driving these results. This implies that the high productivity countries do not, on the balance, offshore automation risk, but rather import it.
    Keywords: Automation risk for employment, Industry 4.0, Globalisation, Global Value Chains
    JEL: F16 O33 J24
    Date: 2019–04–08
  9. By: Pavlova, Elitsa; Signore, Simone
    Abstract: This paper examines the impact of venture capital (VC) investments supported by the EIF on the financial growth and performance of young and innovative firms. Using a novel dataset covering European start-ups supported by VC in the years 2007 to 2014, we generate a counterfactual group of non-VCbacked firms through a combination of exact and propensity score matching. To offset the relatively limited set of observables allowed by our data, we estimate treatment propensity using a series of innovative measures based on machine learning, network theory, and satellite imagery analysis. Our results document the positive effects of EIF-supported VC investments on start-up performance, as measured through various financial indicators (e.g. assets, revenue, employment). We find that VC financing enables start-ups to prioritise long-term growth, trading off short- to medium-term profitability if necessary. Overall, our work provides meaningful evidence towards the positive effects of EIF-supported VC investment on the financial growth of young and innovative businesses in Europe.
    Keywords: EIF,venture capital,public intervention,real effects,start-ups,machine learning,geospatial analysis,network theory
    JEL: G24 L25 M13 O38
    Date: 2019
  10. By: Michael Donadelli (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt; Department of Economics, University Of Venice Cà Foscari); Luca Gerotto (University Of Venice Cà Foscari); Marcella Lucchetta (University Of Venice Cà Foscari); Daniela Arzu (University Of Venice Cà Foscari)
    Abstract: This paper examines the effects of changes in immigration-related uncertainty and fear on the real economic activity in four advanced economies (i.e., US, UK, Germany and France). Immigration uncertainty/fear is first captured by two news-based indicators developed by Baker et al. (2015), namely the Migration Policy Uncertainty Index (MPUI) and the Migration Fear Index (MFI), and then by a novel Google Trend Migration Uncertainty Index based on the frequency of internet searches for “immigration” (GTMU). VAR investigations suggest that the macroeconomic implications of rising immigration uncertainty/fear depend on the country under examination as well as on the way in which immigration uncertainty/fear is measured. In the US and UK, MPUI, MFI and GTMU shocks induce positive long-run effects on the real economic activity. Differently, in Germany, MPUI and MFI shocks lead to expansionary reactions whereas GTMU shocks generate significant adverse effects on the economy. This suggests that increasing media attention and rising population’s interest in immigration-related issues affect people’s mood in a different way. In France, MPUI, MFI and GTMU shocks induce negative macroeconomic effects in the long-run. A battery of robustness tests confirms our main findings.
    Keywords: Immigration, Uncertainty, Fear, Google Trends, Business Cycle
    JEL: C32 E32
    Date: 2018
  11. By: Grytten, Ola Honningdal (Dept. of Economics, Norwegian School of Economics and Business Administration); Koilo, Viktoriia (HSM/NLA)
    Abstract: The present paper applies the financial instability hypothesis in order to explain the financial crises of 2008-2010 in eleven emerging Eastern European economies Also, it seeks to map if institutional frameworks of these countries enabled them to stand against the factors leading into the financial crisis. The paper maps cycles of three macroeconomic indicators representing the real economy, and four indicators representing financial markets. A cycle analysis is conducted with the help of a Hoderick-Prescott filter, made to isolate cycles from trends in time series. The paper concludes that there were substantial positive financial cycles previous to the financial crisis mirrored by similar cycles in the real economy. Similarly, the results show negative cycles in the same parameters during the years of crisis. It seems as an uncontrolled increase in money and credit caused the economy to overheat and thereafter contract in both substantial financial and real economy crises. Also, the paper compiles twelve different indices of institutional development. These are standardized and presented in an institutional development matrix, showing that the institutional framework for the eleven economies was weak previous to and under the melt down of the economy. The construction of an integrated institutional development index on the basis of the same twelve parameters confirm institutional shortcomings, which may have made the economies less able to guard themselves from a crisis initiated by both domestically and internationally financial instability.
    Keywords: Financial Crisis; Financial Instability Hypothesis; Institutional Development; Crisis Anatomy; Financial History; Eastern European Economies; Emerging Economies
    JEL: E32 E44 E51 E52 G15 N14 N24
    Date: 2019–04–27
  12. By: Soares, Ana Cristina
    Abstract: Using firm-level data between 2004 and 2012 for eleven countries of the European Union (EU), we document the size of product and labour market imperfections within narrowly defined sectors including services which are virtually undocumented. Our findings suggest that perfect competition in both product and labour markets is widely rejected. Levels of the price-cost margin and union bargaining power tend to be higher in some service sectors depicting however substantial heterogeneity. Dispersion within sector and across countries tends to be higher in some services sectors assuming a less tradable nature which suggests that the Single Market integration is partial particularly relaxing the assumption of perfect competition in the labour market. We report also figures for the aggregate economy and show that Eastern countries tend to depict lower product and labour market imperfections compared to other countries in the EU. Also, we provide evidence in favour of a very limited adjustment of both product and labour market imperfections following the international and financial crisis.
    Keywords: market imperfection,market structure,nash bargaining,European Union
    JEL: D40 J50 L10
    Date: 2019
  13. By: Ankargren, Sebastian (Uppsala University); Shahnazarian, Hovick (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper estimates the interaction between monetary- and fiscal policy using a structural VAR model with time-varying parameters. For demand and supply shocks, the two policies are estimated to be complementary, while for monetary and fiscal policies shocks the two policies act as substitutes. The budget elasticity varies between 0.3–0.6, indicating that an economic downturn can get a non-negligible negative impact on public finances. The fiscal multiplier is estimated to be stable and higher than one suggesting that fiscal policy can be used to support monetary policy to stabilize the economy in case monetary policy is constrained by the lower effective bound.
    Keywords: Fiscal policy; monetary policy; time-varying parameter structural VAR; zero and sign restrictions; Bayesian estimation
    JEL: C11 C32 E52 E62 E63
    Date: 2019–02–01
  14. By: Wang, Dieter; van Lelyveld, Iman; Schaumburg, Julia
    Abstract: This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants. JEL Classification: G01, G21, C32, C33, C38
    Keywords: bank business model similarities, credit spread puzzle, dynamic network effects model., information contagion, portfolio overlap measure
    Date: 2019–05
  15. By: Fabio Canetg, Daniel Kaufmann
    Abstract: We identify the dynamic causal effects of interest rate floor shocks, exploiting regular auctions of Swiss central bank debt securities (SNB Bills). A theoretical model shows that variation in the volume of, and yield on, central bank debt changes the interest rate floor. In addition, the model establishes the equivalence between central bank debt and interest-bearing reserves when reserves are ample. Based on these insights, the empirical analysis identifies an interest rate floor shock in a dynamic event study of SNB Bill auctions. A restrictive interest rate floor shock causes an increase in the money market rate, a persistent appreciation of the Swiss franc, a decline in long-term interest rates, and a decline in stock prices. We then perform policy experiments under various identifying assumptions in which the central bank raises the interest rate floor from 0% to 0.25%. Such a policy change causes a 3-6% appreciation of the Swiss franc and a 5-20% decline in stock prices
    Keywords: Exit strategies, interest rate floors, central bank debt securities, interest on reserves, monetary policy shocks, identification through heteroscedasticity
    JEL: E41 E43 E44 E52 E58 C32
    Date: 2019–05
  16. By: Guilherme Bandeira (Bank of Spain); Jordi Caballe (Universitat Autonoma de Barcelona and Barcelona GSE); Eugenia Vella (University of Sheffield and MOVE, Universitat Autonoma de Barcelona)
    Abstract: In this paper we propose a new channel through which fiscal austerity affects the macroeconomy. To this end, we introduce endogenous migration both for the unem- ployed and the employed members of the household in a small open economy New Keynesian model with labour market frictions. Our model-based simulations for the austerity mix implemented in Greece over the period 2010-2015 show that the model is able to match the total size of half a million emigrants and output drop of 25%, while the model without migration generates an output drop of 20%. Having established that the model delivers empirically plausible results, we then use it to investigate (i) the two-way relation between migration and austerity, and (ii) the role of migration as shock absorber. We find that tax hikes induce prolonged migration outflows, while the effect of spending cuts is hump-shaped. In turn, emigration implies an increase in both the tax hike and time required to achieve a given size of debt reduction. As a result of the labour-reducing effect of these higher tax hikes, the unemployment gains from migration are only temporary in the presence of austerity and are substantially reversed over time.
    Keywords: Fiscal consolidation, migration, matching frictions, on-the-job search
    JEL: E32 F41
    Date: 2019–04
  17. By: Lago Peñas, Santiago; Vaquero-Garcia, Alberto; Sanchez-Fernandez, Patricio; Lopez-Bermudez, Beatriz
    Abstract: This article provides empirical evidence on the effect of fiscal consolidation in decentralized countries. The focus on Spain is justified for three reasons. First, it is one of the OECD countries that has been the most affected by the Great Recession in terms of both GDP and public deficit. Second, it is one of the most decentralized countries in the world. Third, the compliance with fiscal consolidation targets has been very diverse across regions. Using both time series econometrics and the synthetic control method approach (SCM), the authors show that compliance with fiscal targets at the regional level has not involved lower GDP growth rates in the short run.
    Keywords: fiscal consolidation,regional economic growth,great recession
    JEL: H74 R11 H62
    Date: 2019

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