nep-eec New Economics Papers
on European Economics
Issue of 2019‒06‒17
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A tentative exploration of the effects of Brexit on foreign direct investment vis-à-vis the United Kingdom By Ana de Almeida; Teresa Sastre; Duncan van Limbergen; Marco Hoeberichts
  2. Economic structures 20 years into the euro By Sondermann, David; Consolo, Agostino; Gunnella, Vanessa; Koester, Gerrit; Lambrias, Kyriacos; Lopez-Garcia, Paloma; Nerlich, Carolin; Petroulakis, Filippos; Saiz, Lorena; Serafini, Roberta
  3. An estimation of the effects of Brexit on trade and migration By Rodolfo Campos; Jacopo Timini
  4. Assessing the macroeconomic impact of Brexit through trade and migration channels By Antoine Berthou; Sophie Haincourt; Marie-Elisabeth de la Serve; Ángel Estrada; Moritz A. Roth; Alexander Kadow
  5. Do SVARs with Sign Restrictions Not Identify Unconventional Monetary Policy Shocks? By Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
  6. Market Regulation, Cycles and Growth in a Monetary Union By Mirko Abbritti; Sebastian Weber
  7. Measuring Euro Area Monetary Policy By Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
  8. The Macroeconomic Effects of Tax Reform: Evidence from the EU By van der Wielen, Wouter
  9. The Future of UK Services Trade Post-Brexit: Unlikely to Be Bright By Olga Pindyuk
  10. The Spanish housing market: is it fundamentally broken? By Juan Carlos Cuestas; Merike Kukk
  11. Inflation and Deflationary Biases in Inflation Expectations By Lamla, Michael; PJaifar, Damian; Rendell, Lea
  12. Have Irish sovereign bonds decoupled from the euro area periphery, and why? By Dunne, Peter; McQuinn, Kieran
  13. Non-performing loans, governance indicators and systemic liquidity risk: evidence from Greece By Dimitrios Anastasiou; Zacharias Bragoudakis; Ioannis Malandrakis
  14. Strengthening the Euro Area; The Role of National Structural Reforms in Building Resilience By Romain A Duval; Shekhar Aiyar
  15. The corporate sector and the current account By Jan Behringer; Till van Treeck
  16. The treatment of Intellectual Property in the National Accounts By Robin Lynch
  17. Reassessing the Role of State-Owned Enterprises in Central, Eastern and Southeastern Europe By Christine J. Richmond; Dora Benedek; Peter Dohlman; Francisco J Parodi; James Roaf; Rima Turk; Sebastian Weber
  18. The natural rate of interest: estimates, drivers, and challenges to monetary policy By Claus Brand; Marcin Bielecki; Adrian Penalver

  1. By: Ana de Almeida (Banco de Portugal); Teresa Sastre (Banco de España); Duncan van Limbergen (De Nederlandsche Bank); Marco Hoeberichts (De Nederlandsche Bank)
    Abstract: European Union (EU) integration has boosted inward EU foreign direct investment (FDI) into the United Kingdom (UK). Within the EU, the UK has a relatively significant stock of inward FDI, having reached 61% of its Gross Domestic Product (GDP) in 2017 and risen strongly since 2005. The exit of the UK from the EU and the Single Market will probably result in reduced FDI amongst both investment destinations. The aim of this study is to look at the “real-time” effects of the Brexit June 2016 referendum outcome and its aftermath on UK-related FDI activity. Although FDI flows are notably volatile and biased by periodic non-systematic outliers, and despite some caveats on data sources and availability of time series data, we find tentative evidence of a post-referendum slowdown in gross FDI flows between the UK and the EU, notably involving the big EU economies and Ireland. Regarding a very favoured form of FDI, greenfield FDI, we document a post-referendum fall in announced projects and capital expenditures into the UK by both other EU countries as well as one of the most important non-EU partners, the United States. A different approach is also used to analyse the Brexit effect on FDI activity, based on estimating the effect of two successive stages in the European integration process – EU membership and the Euro area launch – and considering Brexit effects as the reversal of the UK integration into the EU. By using a fixed-effect gravity model to estimate the effects of these integration processes on bilateral FDI activity with the UK, the empirical results suggest that, on the one hand, this country played a role as a gateway for a set of international investor countries outside the Euro area to enter European markets and, on the other, it acted as a hub that reallocated these inflows and those coming from Euro countries across the Euro area itself. Thus the disconnection of the UK from the EU may have further implications for FAI than just reverting the effect of EU membership. Larger trade barriers and lower integration between the UK and the Euro area countries’ markets will likely have a negative impact on FDI activity in the UK and might have, in the short run, a negative effect in the Euro area.
    Keywords: foreign direct investment, FDI, Brexit, EU membership, single currency
    JEL: F15 F21
    Date: 2019–05
  2. By: Sondermann, David; Consolo, Agostino; Gunnella, Vanessa; Koester, Gerrit; Lambrias, Kyriacos; Lopez-Garcia, Paloma; Nerlich, Carolin; Petroulakis, Filippos; Saiz, Lorena; Serafini, Roberta
    Abstract: Well-functioning economic structures are key for resilient and prospering euro area economies. The global financial and sovereign debt crises exposed the limited resilience of the euro area’s economic structures. Economic growth was masking underlying weaknesses in several euro area countries. With the inception of the crises, significant efforts have been undertaken by Member States individually and collectively to strengthen resilience of economic structures and the smooth functioning of the euro area. National fiscal policies were consolidated to keep the increase in government debt contained and structural reform momentum increased notably in the second decade, particularly in those countries most hit by the crisis. The strengthened national economic structures were supported by a reformed EU crisis and economic governance framework. However, overall economic structures in euro area countries are still not fully commensurate with the requirements of a monetary union. Moreover, remaining challenges, such as population ageing, low productivity and the implications of digitalisation, will need to be addressed to increase economic resilience and long-term growth. JEL Classification: E31, E32, E60, E62, F10, J11, O43
    Keywords: economic structures, euro area, growth., resilience
    Date: 2019–06
  3. By: Rodolfo Campos (Banco de España); Jacopo Timini (Banco de España)
    Abstract: This paper uses a gravity model approach to estimate the effects of Brexit in two dimensions: trade in goods and migration. We simulate two scenarios: 1) no agreement with reversión to WTO rules and no special treatment for migrants; 2) signature of a bilateral free trade agreement (FTA). According to our results, Brexit may have large negative effects on trade and migration flows between the EU and the UK. In the WTO scenario, trade flows are predicted to drop by 30% and migration by close to 25%. If the UK and the EU sign an FTA-like agreement (which does not include free mobility of labour), the negative effects on trade are lessened although there is no significant difference in terms of migration with respect to the WTO scenario.
    Keywords: international trade, migration, Brexit, gravity models, United Kingdom, European Union
    JEL: F13 F14 F17 F22
    Date: 2019–05
  4. By: Antoine Berthou (Banque de France); Sophie Haincourt (Banque de France); Marie-Elisabeth de la Serve (Banque de France); Ángel Estrada (Banco de España); Moritz A. Roth (Banco de España); Alexander Kadow (Deutsche Bundesbank)
    Abstract: This joint work by the Bundesbank, the Banque de France and the Banco de España highlights some of the numerous channels through which Brexit will affect the UK economy and its economic partners. In particular, it focuses on trade and migration channels, adding a more general assessment of exiting the EU through the use of a gravity model. The trade cannel alone may cut UK GDP by 2% over the medium term if the UK reverts to WTO rules, while a more general gravity model would point to UK GDP falling by almost 6% compared to baseline. According to our analysis, the ‘cost of non-Europe’ (such as originally stated by Cecchini’s seminal work in 1988) lies therefore between 2% and 6% in terms of real GDP losses for the UK. With the shock being largely asymmetric, the EA remains relatively unscathed by the UK’s exit, with GDP less than 1% lower than baseline by 2023. The study also shows that results are sensitive to the envisaged policy response. In general, monetary and fiscal policies may act to cushion a Brexit-related shock; however, the potency of the policy response depends on the underlying source of the shock.
    Keywords: Brexit, NiGEM, trade, tariffs, non-tariff trade barriers, migration, scenario analysis
    JEL: F15 F42 F53
    Date: 2019–05
  5. By: Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman (-)
    Abstract: A growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis (GFC) had expansionary macroeconomic effects. In a recent paper, Elbourne and Ji (2019) conclude that these studies fail to identify true unconventional monetary policy shocks in the euro area. In this note, we show that their findings are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies and that their approach does not serve the purpose of evaluating identification strategies of SVARs.
    Date: 2019–06
  6. By: Mirko Abbritti; Sebastian Weber
    Abstract: We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.
    Date: 2019–06–03
  7. By: Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
    Abstract: We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.
    Keywords: Asymmetry; ECB policy surprise; Event-Study; intraday; Persistence
    JEL: E43 E44 E52 E58 G12 G14
    Date: 2019–05
  8. By: van der Wielen, Wouter (European Commission - JRC)
    Abstract: This paper examines the macroeconomic effects of tax changes in the EU between 2000 and 2016. The novelty of our approach hinges on the use of real-time estimates of discretionary fiscal adjustments, covering personal income taxes, social insurance contributions, corporate income taxes and value added taxes. In particular, exploiting a unique database covering anticipated and unanticipated tax reforms in the EU, we provide the first narrative estimates of output and employment multipliers for tax reforms in the EU. Our results suggest that medium-term revenue-based output multipliers are in the range of -1.8 for unanticipated and -2.3 for anticipated reforms. Preannounced reforms, moreover, portray larger labour supply responses (by 0.7 percentage points) and temporarily impact economic activity inversely upon announcement. Finally, we find evidence of asymmetry between the effects of revenue increasing and decreasing measures in the EU. On average, revenue-based consolidations resulted in a 1.2 percentage point larger medium-term output multiplier in absolute terms.
    Keywords: fiscal multipliers, narrative approach, discretionary tax reform
    Date: 2019–06
  9. By: Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Trade in services was overshadowed by trade in goods in the Brexit debate, undeservingly so as services account for almost half of the UK cross-border exports and the EU is a major market for UK services exporters. Leaving the EU Single Market in services will cause increased regulatory costs of trading services and could have significant effects on the volume and composition of UK services exports under any exit deal. The highest rise in trade costs is to be expected in professional services, such as legal services, architecture, engineering, and accounting. With a rise in cross-border trade barriers there would be a relative increase in the proportion of services provided via a more costly physical presence within the EU. Regulatory heterogeneity among the EU members towards third countries will be an additional factor behind significant shifts in the sectoral and geographic composition of the UK services exports.
    Keywords: services trade, Brexit, Single Market
    JEL: L80 F13 F15
    Date: 2019–06
  10. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain); Merike Kukk (Department of Economics and Finance, Tallinn University of Technology, Estonia)
    Abstract: This paper aims to investigate the relationship between housing prices and their fundamental determinants using the example of Spain and considering the possibility of structural breaks in the relationship. We find that the cointegrating coefficient estimates are quite unstable and need to be estimated for different subperiods. Specifically we find that the standard fundamentals explain the behaviour of equilibrium house prices well during the boom-bust period. However, only corporate profit or capital income seems to explain the evolution in recent years.
    Keywords: house prices, capital income, wage income, DOLS, structural breaks, crisis
    JEL: E21 E51 R20
    Date: 2019
  11. By: Lamla, Michael; PJaifar, Damian; Rendell, Lea
    Abstract: We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that both inflation bias and deflationary bias can exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present and sizable, but different across countries. Even among the euro-area countries, perceptions of the European Central Bank’s objectives are very distinct.
    Keywords: inflation bias, deflationary bias, confidence in central banks, trust, effective lower bound, inflation expectations, microdata.
    Date: 2019–06–06
  12. By: Dunne, Peter; McQuinn, Kieran
    Date: 2019
  13. By: Dimitrios Anastasiou (Athens University of Economics and Business and Alpha Bank); Zacharias Bragoudakis (Bank of Greece); Ioannis Malandrakis (Athens University of Economics and Business)
    Abstract: In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996-2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.
    Keywords: Credit risk; Greek banking sector; Non-performing loans; Systemic liquidity risk; Worldwide Governance Indicators.
    JEL: C51 G21 G2 G38
    Date: 2019–05
  14. By: Romain A Duval; Shekhar Aiyar
    Abstract: The SDN will focus mostly on EA countries but also touch on other AEs for comparison purposes. The SDN will make several original contributions in each of the areas above based on new DSGE-model-based analysis, cross-country panel regressions, and individual-level (firm- or household-level) empirical work where appropriate.
    Keywords: Euro Area (EA);Labor market reforms;Labor market regulations;Structural reforms; Resilience; Labor market regulations; Labor market reforms
    Date: 2019–06–17
  15. By: Jan Behringer; Till van Treeck
    Abstract: In this paper, we analyze how corporate sector behavior has affected national current account balances in a sample of 25 countries for the period 1980-2015. A consistent finding is that an increase (decrease) in corporate net lending leads to an increase (decrease) in the current account, controlling for standard current account determinants. We disentangle the current account effects of corporate saving and investment and we explore a number of alternative explanations of our results, including incomplete piercing of the "corporate veil", by households, foreign direct investment activities, a temporary crisis phenomenon, and changes in income inequality. We conclude that corporate sector saving is an important driver of macroeconomic trends and that the rise of corporate net lending especially in a number of current account surplus countries has contributed considerably to global current account imbalances.
    Keywords: Corporate sector, sectoral financial balances, current account determinants
    JEL: E21 F41 G35
    Date: 2019
  16. By: Robin Lynch
    Abstract: The paper identifies flaws in the treatment of Intellectual Property as an intangible asset in the current national accounts international standards. It is proposed that the treatment should revert to that of the 1968 System of National Accounts (SNA), where payments for access to Intellectual Property were classified as property income (income transfers) and not as payment for services as in SNA 2008 and the European System of Accounts (ESA) 2010. This dramatic change in treatment has had unfortunate results, most visibly in the case of the revision to GDP estimates for Ireland. In 2016, the estimate for Ireland’s 2015 annual GDP growth was revised upwards from 7.8% to 26.3%. This was caused mainly by a relocation of a large multinational’s registration of Intellectual Property from mainland Europe. The associated access payments were treated as a set of new exports of services, with the subsequent large increase in the GDP level and growth measures of the Irish economy. This paper sets out how the current standards lead to this widely criticised change and proposes a model which is consistent with the 1968 SNA treatment.
    Keywords: system of national accounts, intellectual property, intangibles
    JEL: E01 E22
    Date: 2019–06
  17. By: Christine J. Richmond; Dora Benedek; Peter Dohlman; Francisco J Parodi; James Roaf; Rima Turk; Sebastian Weber
    Abstract: The Central, Eastern, and South Eastern European (CESEE) region is ripe for a reassessment of the role of the state in economic activity. The rapid income convergence with Western Europe of the early 2000s was not always equally shared across society, and it has now slowed dramatically in many countries of the region.
    Keywords: Business enterprises;Central and Eastern Europe;Public enterprises;
  18. By: Claus Brand (European Central Bank); Marcin Bielecki (Narodowy Bank Polski); Adrian Penalver (Banque de France)
    Abstract: Using a wide range of models we document a protracted fall in the natural (or neutral) rate of interest in advanced economies, driven by ageing, waning productivity growth, arise in mark-ups, and a surge in risk aversion in the wake of the global financial crisis. While our neutral rate estimates are highly uncertain and model dependent, most of them have been negative in the wake of the financial crisis. This observation is highly relevant for assessing the monetary policy stance and the risk of monetary policy becoming constrained by the lower bound on nominal interest rates. We highlight model dependence of natural rate estimates by illustrating large differences in their stabilising properties, depending on the context chosen. We also emphasise high statistical uncertainty of natural rate estimates within models. Looking ahead, a return to higher levels would have to come from a reversal in risk aversion and flight to safety and a boost in productivity. To achieve this, structural reforms are crucial.
    Keywords: Natural rate of interest, return on capital, demographics, productivity growth, monetary policy
    JEL: E52 E43
    Date: 2019

This nep-eec issue is ©2019 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.