nep-eec New Economics Papers
on European Economics
Issue of 2019‒07‒15
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sectoral Reallocations, Real Estate Shocks and Productivity Divergence in Europe: A Tale of Three Countries By Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
  2. The determinants of austerity in the European Union 2010-16 By Roberto Tamborini; Matteo Tomaselli
  3. Do SVARs with sign restrictions not identify unconventional monetary policy shocks? By Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
  4. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  5. Inflation interdependence in advanced economies By Luis J. Álvarez; Ana Gómez-Loscos; María Dolores Gadea
  6. Divisia monetary aggregates for a heterogeneous euro area By Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea
  7. Macroprudential stress test of the euro area banking system By Budnik, Katarzyna; Covi, Giovanni; Dimitrov, Ivan; Groß, Johannes; Hansen, Ib; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz; Cera, Katharina; di Iasio, Giovanni; Giuzio, Margherita; Mirza, Harun; Moccero, Diego; Nicoletti, Giulio; Pancaro, Cosimo; Balatti, Mirco; Palligkinis, Spyros
  8. Current account imbalances and the Euro Area. Alternative views By Ronny Mazzocchi; Roberto Tamborini
  9. Production Network and International Fiscal Spillovers By Michael B. Devereux; Karine Gente; Changhua Yu
  10. Strong firms, weak banks: The financial consequences of Germany's export-led growth model By Braun, Benjamin; Deeg, Richard
  11. The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian

  1. By: Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
    Abstract: The creation of the European Monetary Union (EMU) in 1999 was expected to become a catalyst for real convergence in Europe. Far from being the case, real divergence increased from the early 1990s as evidenced by low productivity growth in the “periphery” of the Euro area relative to “core” countries. This report investigates the role of sectoral reallocation in this divergence, focusing on three archetypal countries: France, Germany, and Spain. Using the EU-KLEMS database of sectoral Total Factor Productivity (TFP), we first show that sector reallocations have been at the origin of productivity losses in the considered countries and contributed significantly to this divergence. Second, we investigate how the substantially diverging real estate prices between these countries could explain those sectoral reallocations. More specifically, when access to external finance is restricted due to financial frictions, real estate assets may be used as collateral by borrowers to relax these constraints and increase investments. Real estate shocks turn out to be a strong driver of productivity divergence, causing the lag of Spain behind Germany before the Great Recession and that of France afterwards. For comparison purpose, we also shed light on the role of sectoral reallocation in the UK productivity puzzle.
    Keywords: Total Factor Productivity;European Integration;Financial Frictions;Real Estate
    JEL: G3 O4 R3
    Date: 2019–05
  2. By: Roberto Tamborini; Matteo Tomaselli
    Abstract: This paper aims at explaining what drove the adoption of austerity policies over the period 2010-16 in a panel of 28 European countries. Austerity is identified by year increases in the ratio between the structural primary balance and potential GDP. By means of principal component factor analysis we select the aggregate factors that might affect austerity, namely (i) fiscal consolidation (correction of high deficits and debts), (ii) market discipline (high sovereign spreads, low ratings), (iii) rule-based fiscal discipline (compliance with the Eurozone rules), and macroeconomic stabilisation (consideration for the cyclical position of the economy). Then we estimate a dynamic panel model with the system-GMM method. Results show that the most important contributions to austerity are provided by the market discipline and fiscal consolidation factors together with Excessive Deficit Procedures, with no significant role played by concomitant macroeconomic conditions. Overall, governments complied with orthodox fiscal principles and rules.
    Keywords: Austerity, Fiscal reaction functions, Principal component factor analysis, Dynamic panel data analysis
    JEL: E6 E62 E65
    Date: 2019
  3. By: Jef Boeckx (National Bank of Belgium); Maarten Dossche (European Central Bank); Alessandro Galesi (Banco de España); Boris Hofmann (Bank for International Settlements); Gert Peersman (Ghent University)
    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.
    Keywords: unconventional monetary policy, SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2019–07
  4. By: Anna Samarina (De Nederlandsche Bank & University of Groningen); Anh D.M. Nguyen (Bank of Lithuania & Vilnius University)
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality, monetary policy, euro area
    JEL: D63 E50 E52
    Date: 2019–06–14
  5. By: Luis J. Álvarez (Banco de España); Ana Gómez-Loscos (Banco de España); María Dolores Gadea (University of Zaragoza)
    Abstract: Although there is a vast literature on GDP comovement across countries, there is scant evidence on inflation interdependence. We analyze inflation comovements across a wide set of advanced economies and across the subset of euro area countries. Some of our findings are expected, such as the fact that inflation interdependence among advanced economies is quite relevant, but is higher among euro area countries, which show strong trade links and a share common monetary policy, or the fact that inflation synchronization among countries is highest for energy prices, reflecting common oil shocks. We also find a robust puzzle: core inflation interdependence is fairly low and this result holds for both core goods and services. Inflation synchronization seems to be particularly linked to comovements in driving variables of open economy new Keynesian Phillips curve and mark-up pricing models.
    Keywords: inflation, synchronization, filtering, price heterogeneity, trend inflation
    JEL: E31 E32 C50
    Date: 2019–06
  6. By: Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea
    Abstract: We introduce a Divisia monetary aggregate for the euro area that accounts for the heterogeneity across member countries both, in terms of interest rates and the decomposition of monetary assets. In most of the euro area countries, the difference between the growth rates of the country-specific Divisia aggregate and its simple sum counterpart is particularly pronounced before recessions. The results obtained from a panel probit model confirm that the divergence between the Divisia and the simple sum aggregate has a significant predictive content for recessions in euro area countries.
    Keywords: Monetary aggregation,Euro area Divisia aggregate,Recessions
    JEL: E51 E32 C43
    Date: 2019
  7. By: Budnik, Katarzyna; Covi, Giovanni; Dimitrov, Ivan; Groß, Johannes; Hansen, Ib; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz; Cera, Katharina; di Iasio, Giovanni; Giuzio, Margherita; Mirza, Harun; Moccero, Diego; Nicoletti, Giulio; Pancaro, Cosimo; Balatti, Mirco; Palligkinis, Spyros
    Abstract: This paper presents an approach to a macroprudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants, and the real economy. Our results highlight the importance of the starting level of bank capital, bank asset quality, and banks’ adjustments for the propagation of shocks to the financial sector and real economy. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real-financial feedback mechanism
    Date: 2019–07
  8. By: Ronny Mazzocchi; Roberto Tamborini
    Abstract: The critical role of current account imbalances (CAI) is widely shared in the consensus narratives of the European crisis that followed the Great Recession. On the basis of this interpretation, new EU initiatives raised, in particular the so-called “Six Pack†adoption in 2011 and the establishment of the European Semester procedure to improve policy coordination in the EU beyond fiscal matters. This package includes the Macroeconomic Imbalances Procedure (MIP) that broadens the EU economic governance framework to include the surveillance of unsustainable macroeconomic trends. Although the widening of the CAI in the Euro Area is a matter of fact, and the consensus narrative contains elements of truth, alternative views have been put forward on mainly three issues: i) their relevance, ii) their causes and connection with the crisis, and iii) their policy implications. The aim of this paper is to examine these controversial points about the causes, meaning and consequences of CAI, and discuss the alternative policy prescriptions that emerge.
    Date: 2019
  9. By: Michael B. Devereux (Vancouver school of economics, University of British Columbia, NBER and CEPR); Karine Gente (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, Marseille, France); Changhua Yu (China Center for Economic Research, National School of Development, Peking University, Beijing, China,)
    Abstract: This paper analyzes the impact of fiscal spending shocks in a multi-country model with international production networks. In contrast to standard results suggesting that production network linkages are unimportant for the aggregate response to macro shocks in a closed economy, we show that network structures may place a central role in the international propagation of fiscal shocks, particularly when wages are slow to adjust. The paper first develops a simple general equilibrium multi-country model and derives some analytical results on the response to fiscal spending shocks. We then apply the model to an analysis of fiscal spillovers in the Eurozone, using the calibrated sectoral network structure from the World Input Output Database (WIOD). In a version of the model with sticky wages, we find that fiscal spillovers from Germany and other some other large Eurozone countries may be large, and within the range of empirical estimates. More importantly, we find that the Eurozone production network very important for the international spillovers. In the absence of international production network linkages, spillovers would be only a third as large as predicted by the baseline model. Finally, we explore the diffusion of identified German government spending at the sectoral level, both within and across countries. We find that government expenditures have both significant upstream and downstream effects when these links are measured by the direction of sectoral production linkages.
    Keywords: production network, fiscal policy, spillovers, Eurozone, terms of trade, nominal rigidities
    JEL: E23 E62 F20 F42 H50
    Date: 2019–07
  10. By: Braun, Benjamin; Deeg, Richard
    Abstract: The financial foundation of Germany's manufacturing success, according to the comparative capitalism literature, is an ample supply of long-term capital, provided to firms by a three-pillar banking system and "patient" domestic shareholders. This premise also informs the recent literature on growth models, which documents a shift towards a purely export-led growth model in Germany since the 1990s. We challenge this common assumption of continuity in the German financial system. Export-led growth, characterized by aggregate wage suppression and high corporate profits, has allowed non-financial corporations to increasingly finance investment out of retained earnings, thus lowering their dependence on external finance. This paper documents this trend and shows that business lending by banks has increasingly been constrained on the demand side, reducing the power - and relevance - of banks vis-à-vis German industry. The case study suggests a need for students of growth models to pay greater attention to the dynamic interaction between institutional sectors in general, and between the financial and the non-financial sectors in particular.
    Keywords: bank power,business lending,corporate finance,institutional change,non-financial corporations,Banken,exportorientiertes Wachstumsmodell,institutioneller Wandel,Kreditgeschäft,Unternehmensfinanzierung
    Date: 2019
  11. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: This paper examines determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). Applying the annual data of 58 countries, we confirm that countries that trade more with the US, euro zone, UK, and Japan, and issue more debt denominated in the big four currencies (US dollar, euro, pound, yen) hoard more IR in these currencies. We find scale effects in which countries tend to diversify from the big four currencies as they increase their IR/GDP and that a growing shortage of global safe assets (GSAs) induces countries to hold more big four currencies. Countries hold less big four currencies as IR after the 2008 GFC, while they hold more of such currencies since the tapering of the Fed’s quantitative easing. The 2008 GFC and QE tapering weakened and sometimes reversed the effect of several economic factors. We also find that TARGET2 balances matter for the currency composition in the euro zone; commodity-exporting countries tend to diversify their IR from the big four currencies when their terms of trade improve; and that the valuation effects induced by Euro/USD exchange rate changes diminish the significance of the GFC in explaining the currency composition of IR.
    JEL: F15 F3 F31
    Date: 2019–06

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