nep-eec New Economics Papers
on European Economics
Issue of 2019‒07‒29
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The ECB’s monetary pillar after the financial crisis By T. Philipp Dybowski; Bernd Kempa
  2. Phillips curves in the euro area By Moretti, Laura; Onorante, Luca; Zakipour Saber, Shayan
  3. Exchange rate pass-through to import prices: Accounting for changes in the Eurozone trade structure By Valérie Mignon; Antonia Lopez Villavicencio
  4. Social Collateral and consumer payment media during the economic crisis in Europe By Konstantinos Nikolopoulos; Konstantia Litsiou
  5. Inflation and the Current Account in the Euro Area By Galstyan, Vahagn
  6. Financing economic growth in Greece: lessons from the crisis By Helen Louri; Petros Migiakis
  7. The benefits and costs of adjusting bank capitalisation: evidence from euro area countries By Katarzyna Budnik; Gaia Barbic; Giulio Nicoletti; Massimiliano Affinito; Fabrizio Venditti; Saiffedine Ben Hadj; Hans Dewachter; Edouard Chretien; Clara Isabel González; Javier Mencía; Jenny Hu; Jairo Rivera-Rozo; Lauri Jantunen; Otso Manninen; Ramona Jimborean; Ricardo Martinho; Ana Regina Pereira; Elena Mousarri; Constantinos Trikoupis; Laurynas Naruševicius; Michael O’Grady; Sofia Velasco; Selcuk Ozsahin
  8. Is the UK Productivity Slowdown Unprecedented? By Crafts, Nicholas; Mills, Terence C.
  9. Forecasting in the euro area: The role of the US long rate By Zakipour-Saber, Shayan
  10. Production Network and International Fiscal Spillovers By Michael Devereux; Karine Gente; Changhua Yu
  11. Austerity in the Aftermath of the Great Recession By Christopher L. House; Christian Proebsting; Linda L. Tesar
  12. Relatedness, economic complexity and convergence across European regions By Tullio Buccellato; Giancarlo Corò
  13. Do Stock Markets Lead or Lag Macroeconomic Variables? Evidence from Select European Countries By Silvio John, Camilleri; Nicolanne, Scicluna; Ye, Bai

  1. By: T. Philipp Dybowski; Bernd Kempa
    Abstract: We apply a structural topic model (STM) to analyze European Central Bank (ECB) communication regarding the monetary pillar of its monetary policy strategy. We do so by quantifying the transcripts of the ECB Presidents introductory statements at the press conferences that accompany the regular meetings of the ECB Governing Council. Our evidence shows that, within its monetary pillar, the ECB has gradually shifted its focus away from a genuine monetary analysis towards monitoring the stability of the European financial system. We go on to augment a standard Taylor rule by quantitative indicators obtained from the STM to assess whether the monetary pillar in general, and the shift in focus in particular, has had a measurable impact on the ECBs monetary policy stance. We find weak evidence that the monetary analysis has had a bearing on the ECBs interest rate setting in the early years of the ECB's existence, but this influence completely disappears in the latter years of the sample. We also find that after the financial crisis, the monetary policy response to its financial sentiment communication has been accommodative rather than "leaning against the wind".
    Keywords: ECB, monetary policy, central bank communication, topic models
    JEL: C11 E52 E58
    Date: 2019–07
  2. By: Moretti, Laura; Onorante, Luca; Zakipour Saber, Shayan
    Abstract: We perform a robust estimation of the Phillips curve in the euro area using a battery of 630 theory-driven models. We extend the existing literature by adding model specifications, taking into account the uncertainty in the measurement of variables and testing for potential non-linearities and structural changes. Using Dynamic Model Averaging, we identify the most important determinants of inflation over the sample. We then forecast core inflation 12 quarters ahead and present its probability distribution. We compare the distribution of forecasts performed in recent years, and we assess, in a probabilistic manner, the convergence towards a sustainable path of inflation. JEL Classification: C30, E52, F41, E32
    Keywords: density forecast, Dynamic Model Averaging, non linearities, Phillips curves, structural changes
    Date: 2019–07
  3. By: Valérie Mignon; Antonia Lopez Villavicencio
    Abstract: This paper assesses whether the emergence of new trading partners (i.e., China and Eastern Europe) as suppliers reduces the exchange rate pass-through (ERPT) in Eurozone countries which differ regarding their external exposure. Using bilateral data on import prices at the two-digit sector level, we find that (i) pass-through is complete in many cases, (ii) ERPT from China is higher than from the United States, and (iii) there is no compelling evidence of a generalized link between ERPT and the increasing integration of some emerging markets in European imports. We also show that the launch of the single currency has not provoked a sufficient change in the part of trade exposed to exchange rate fluctuations and, therefore, has not affected the pass-through. Overall, the trend of liberalization in new players' markets has not altered the competitive environment such as to induce exporters of other countries to absorb exchange rate depreciations.
    Keywords: Exchange rate pass-through; import prices; China; Eastern Europe; Eurozone
    JEL: E31 F31 F4 C22
    Date: 2019
  4. By: Konstantinos Nikolopoulos (Bangor University); Konstantia Litsiou (Manchester Metropolitan University)
    Abstract: In this research paper we investigate the relationship between economic crises and the changes in levels of social collateral, as well as the indirect changes in the use of payment media from consumers as a result of the latter. The scene is Europe in 2015 and the Eurozone crisis involving countries mostly hit form the crisis: Greece, Cyprus and to a lesser extent Spain, versus less affected economies like Sweden and UK. We use and analyse questions focusing on social collateral, taken from a much broader research instrument - a questionnaire with 54 questions that have been used in a series of studies focusing in the use of payment media during 2015. From a total of 1003 gathered questionnaires a comparative analysis is performed through time and space focusing on three periods: before the start of the crisis in 2008, after that, and during the last 12 months; in terms of geographical dispersion, the aforementioned five countries are researched. Our empirical results provide some preliminary evidence indicating an heterogeneous behaviour among the five countries under investigation, as well as a clear change over time - partially explained by the impact of the crisis.
    Keywords: Financial Crisis; Social Collateral; Households; Payment media; Europe;
    JEL: G01 A13 D10 H31 E4
    Date: 2019–07
  5. By: Galstyan, Vahagn (Central Bank of Ireland)
    Abstract: The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.
    Date: 2019–05
  6. By: Helen Louri (Athens University of Economics and Business); Petros Migiakis (Bank of Greece)
    Abstract: We examine the existence of a feedback loop between the resilience of the financial sector and Greek economic activity. A sequence of structural VARs is employed using data for bank credit, liquidity, capital, asset quality and private demand in 2001-2018 in two data sets. One in monthly frequency with which we examine the determinants of credit provision by Greek banks, and another in quarterly frequency with which we examine the finance-growth nexus for the Greek economy. We find that (a) the deterioration in the quality of Greek banks’ balance sheets affected negatively the provision of credit to the economy, (b) central bank liquidity and recapitalizations of Greek banks provided only a partial remedy and (c) the decline in credit significantly weakened economic activity. Also, we find that there is a role for market financing of the economy but this cannot substitute for the predominantly bank-based financing. Therefore, as the Greek economy starts bouncing back Greek banks have an important role to play, first by solving the high NPLs problem and providing the necessary credit and second by improving the efficiency of capital allocation towards a sustainable growth model.
    Keywords: Greek crisis; credit provision; finance-growth nexus; financial stability; NPLs.
    JEL: E22 E44 G01 G21
    Date: 2019–06
  7. By: Katarzyna Budnik (European Central Bank); Gaia Barbic (European Central Bank); Giulio Nicoletti (European Central Bank); Massimiliano Affinito (Banca d’Italia); Fabrizio Venditti (Banca d’Italia); Saiffedine Ben Hadj (Banque Nationale de Belgique/Nationale Bank van België); Hans Dewachter (Banque Nationale de Belgique/Nationale Bank van België); Edouard Chretien (Autorité de contrôle prudentiel et de résolution); Clara Isabel González (Banco de España); Javier Mencía (Banco de España); Jenny Hu (De Nederlandsche Bank); Jairo Rivera-Rozo (De Nederlandsche Bank); Lauri Jantunen (Suomen Panki); Otso Manninen (Suomen Panki); Ramona Jimborean (Banque de France); Ricardo Martinho (Banco de Portugal); Ana Regina Pereira (Banco de Portugal); Elena Mousarri (Central Bank of Cyprus); Constantinos Trikoupis (Central Bank of Cyprus); Laurynas Naruševicius (Lietuvos Bankas); Michael O’Grady (Central Bank of Ireland); Sofia Velasco (Central Bank of Ireland); Selcuk Ozsahin (Banca Slovenije)
    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 fullyfledged 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.
    Keywords: FAVAR, capital regulation, cost-benefit analysis, banking system resilience
    JEL: E51 G21 G28
    Date: 2019–07
  8. By: Crafts, Nicholas (University of Warwick); Mills, Terence C. (Loughborough University)
    Abstract: We estimate trend UK labour productivity growth using a Hodrick-Prescott filter method. We use the results to compare downturns where the economy fell below its pre-existing trend. We find that the current productivity slowdown has resulted in productivity being 19.7% below the pre-2008 trend path in 2018. This is nearly double the previous worst productivity shortfall ten years after the start of a downturn. On this criterion the slowdown is unprecedented in the last 250 years. We conjecture that this reflects a combination of adverse circumstances, namely, a financial crisis, a weakening impact of ICT and impending Brexit.
    Keywords: Brexit; financial crisis; Hodrick-Prescott filter; ICT; productivity slowdown JEL Classification: C22; N13; N14; O47
    Date: 2019
  9. By: Zakipour-Saber, Shayan (Central Bank of Ireland)
    Abstract: This letter analyses the relationship between economic variables in the euro area and the United States and determines the importance of various indicators in forecasting the euro area macroeconomy. Results using a novel empirical technique show that innovations in the U.S. long-term interest rate (long rate) explain substantial variation in euro area GDP and inflation. This finding is consistent over a historical sample and supports the emphasis placed on U.S. economic conditions when constructing projections of the euro area macroeconomic outlook. The important contribution of the U.S. long rate most likely indicates its value as a proxy for the state of the global economy.
    Date: 2019–06
  10. By: Michael Devereux (Vancouver school of economics, University of British Columbia, NBER - National Bureau of Economic Research - National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR); Karine Gente (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Changhua Yu (China Center for Economic Research, National School of Development, Peking University)
    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
    Date: 2019–06–21
  11. By: Christopher L. House (University of Michigan & NBER); Christian Proebsting (Ecole Polytechnique Federale de Lausanne); Linda L. Tesar (University of Michigan & NBER)
    Abstract: Cross-country differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.
    Keywords: Austerity, Fiscal Policy, Multi-Country DSGE Model
    JEL: E62 F41 F44
    Date: 2019–02–07
  12. By: Tullio Buccellato (Economic Research Department, Confindustria.); Giancarlo Corò (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The aim of this paper is to analyze how the heterogeneous structure of the European regions has affected their patterns of convergence or divergence. We analyse data collected by Eurostat, from a balanced panel of 191 regions and 55 economic branches over the period 2003-2015. In this way, we are able to describe and capture technological proximity across the regions and analyse how it has evolved over space and time. Limiting the analysis to the manufacturing activities, we are also able to measure the degree of economic complexity of the regional production systems and assess how this affects their patterns of growth. Our findings suggest that there are pushing (enhancing convergence) and pulling (exacerbating economic gaps) forces to economic convergence. Spatial effects tend to push towards convergence, with the Eastern regions that started from relatively low levels of GDP per capita and experienced higher growth rates. Nevertheless, the different level of economic complexity tends to widen the gaps between territories: for example, the German regions, whose economic structures are more complex, have kept on widening the gap between themselves and the other European regions. The two different forces are also interconnected as the Eastern regions combine a relatively low level of GDP per capita with a significant level of economic complexity. During the period considered, the improvement in living standards has corresponded to the upgrade of their manufacturing production structures.
    Keywords: Regional disparities, growth, convergence, structural change, relatedness, economic complexity, spatial effects
    JEL: O10 O25 P25 R10 L16
    Date: 2019
  13. By: Silvio John, Camilleri; Nicolanne, Scicluna; Ye, Bai
    Abstract: This study examines the connections between stock prices and key macroeconomic indicators: inflation, industrial production, interest rates, money supply and select interactions between the latter group of variables. Such links are evaluated through vector-autoregressions (VARs) on monthly data spanning over the period 1999-2017, for Belgium, France, Germany, Netherlands and Portugal. We check whether such relations are confirmed across different sub-periods and also adopt a non-parametric approach by using a Pesaran-Timmermann test. We find different contemporaneous and lead-lag relationships between stock prices and the selected variables, although there are variations across countries. VAR models indicate that stock prices significantly lead inflation across all countries during the sample period and in most cases this relationship was positive. In addition, stock prices significantly lead industrial production in four of the sampled countries and these relationships were positive as well. Contrary to long-established finance theories, we did not find numerous significant links between interest rates and stock indices; however the interaction between interest rates and money supply was a leading indicator of stock prices in France, Germany and Portugal.
    Keywords: Stock prices, Macroeconomic indicators, Pesaran-Timmermann test, Structural breakpoint tests, Vector autoregression
    JEL: G10 G12 G15
    Date: 2019

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