nep-eec New Economics Papers
on European Economics
Issue of 2019‒08‒19
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Euro Crisis and Economic Growth: A Novel Counterfactual Approach By Alessio Terzi
  2. Bank loan supply shocks and alternative financing of non-financial corporations in the euro area By Mandler, Martin; Scharnagl, Michael
  3. Capital flows in the euro area and TARGET2 balances By Hristov, Nikolay; Hülsewig, Oliver; Wollmershäuser, Timo
  4. Interest rate bands of inaction and play-hysteresis in domestic investment: Evidence for the euro area By Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
  5. Role of cross currency swap markets in funding and investment decisions By Brophy, Thomas; Herrala, Niko; Jurado, Raquel; Katsalirou, Irene; Le Quéau, Léa; Lizarazo, Christian; O’Donnell, Seamus
  6. Introducing dominant currency pricing in the ECB's global macroeconomic model By Georgiadis, Georgios; Mösle, Saskia
  7. European Wage Dynamics and Spillovers By Yuanyan Sophia Zhang
  8. Forecasting ECB policy rates with different monetary policy rules By Belke, Ansgar; Klose, Jens
  9. Integration in Global Value Chains and Employment in Europe By Filippo Bontadini; Rinaldo Evangelista; Valentina Meliciani; Maria Savona
  10. Changes in sovereign debt dynamics in Central and Eastern Europe By Juan Carlos Cuestas
  11. Exploring Wage Phillips Curves in Advanced Economies By Rose Cunningham; Vikram Rai; Kristina Hess
  12. Government Deficit Shocks and Okun's Coefficient Volatility: New Insights on the Austerity versus Growth Debate By Pham, Binh Thai; Sala, Hector
  13. A dynamic version of Okun's law in the EU15 countries - The role of delays in the unemployment-output nexus By Obst, Thomas
  14. Propagation of sector-specific shocks within spain and other countries By Mario Izquierdo; Enrique Moral-Benito; Elvira Prades
  15. A macroeconomic vulnerability model for the euro area By Sondermann, David; Zorell, Nico
  16. Capital Flight to Germany: Two Alternative Measures By Yin-Wong Cheung; Sven Steinkamp; Frank Westermann

  1. By: Alessio Terzi
    Abstract: Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be traced back to a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs.
    Keywords: macroeconomic adjustment, financial crisis, Eurozone, growth, propensity score matching
    JEL: E63 E65 F31 F32 F33 F36
    Date: 2019
  2. By: Mandler, Martin; Scharnagl, Michael
    Abstract: We analyse the macroeconomic effects of exogenous contractions in bank lending to non-financial corporations in the Euro Area, Germany, France, Italy and Spain using a Bayesian vector autoregressive model with endogenous hyperparameter selection and identification via sign restrictions. We focus on the behaviour of firms' external financing sources alternative to bank loans, such as financing via equity, debt securities, trade credit and lending from non-banks. We investigate whether these alternative financing sources are complements to or substitutes for bank lending using the joint posterior distribution of their impulse responses with that of bank loans. For the Euro Area our results show equity, debt securities and non-bank loans to be substitutes for bank loans with negative responses to a positive loan supply shock while trade credit is a complement and responds positively. We show that the substitution relationship with respect to bank loans is more clearly visible in the joint distribution of the financing sources reactions than when focusing only on the marginal impulse responses. Quantitatively, the developments in bank loans and trade credit dominate the response of the overall sum of the external financing. This result also holds in most cases at the country level. However, whether and which of the alternative financing sources are substitutes for or complements to bank loans differs across countries.
    Keywords: loan supply,external financing,Euro Area,Bayesian VAR,sign restrictions,joint posterior distribution
    JEL: C32 E32 E51
    Date: 2019
  3. By: Hristov, Nikolay; Hülsewig, Oliver; Wollmershäuser, Timo
    Abstract: We estimate a panel VAR model for the euro area to quantitatively assess how the uneven recourse of national banking systems in the euro area to the ECB's unconventional refinancing operations that led to the accumulation of large TARGET2 balances, has contributed to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries in the period 2008-2014. Our results suggest that the built-up of TARGET2 balances was mainly driven by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on basis of counterfactual experiments we find that the ability to build-up sizable TARGET2 liabilities has contributed substantially to avoid deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.
    Keywords: Euro area,TARGET2 balances,capital in flow shocks,panel vector autoregressive model
    JEL: E42 F32 F41
    Date: 2019
  4. By: Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
    Abstract: The interest rate represents an important monetary policy tool to steer investment in order to reach price stability. Therefore, implications of the exact form and magnitude of the interest rate-investment nexus for the European Central Bank's effectiveness in a low interest rate environment gain center stage. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call 'play' area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia.
    Keywords: European Central Bank,interest rate,investment,monetary policy,nonideal relay,pathdependence,play-hysteresis,uncertainty
    JEL: C32 E44 E49 E52 F21
    Date: 2019
  5. By: Brophy, Thomas; Herrala, Niko; Jurado, Raquel; Katsalirou, Irene; Le Quéau, Léa; Lizarazo, Christian; O’Donnell, Seamus
    Abstract: A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy. JEL Classification: D53, E52, G11, G15, G18
    Keywords: balance sheet constraints, balance sheet reporting dates, cross-border investment and funding flows, cross currency basis swap, monetary policy divergence, US dollar funding premium
    Date: 2019–08
  6. By: Georgiadis, Georgios; Mösle, Saskia
    Abstract: A large share of global trade being priced and invoiced primarily in US dollar rather than the exporter's or the importer's currency has important implications for the transmission of shocks. We introduce this "dominant currency pricing" (DCP) into ECB-Global, the ECB's macroeconomic model for the global economy. To our knowledge, this is the first attempt to incorporate DCP into a major global macroeconomic model used at central banks or international organisations. In ECB-Global, DCP affects in particular the role of expenditure switching and the US dollar exchange rate for spillovers: In case of a shock in a non-US economy that alters the value of its currency multilaterally, expenditure switching occurs only through imports; in case of a US shock that alters the value of the US dollar multilaterally, expenditure switching occurs both in non-US economies' imports and - as these are imports of their trading partners - exports. Overall, under DCP the US dollar exchange rate is a major driver of global trade, even for transactions that do not involve the US. In order to illustrate the usefulness of ECB-Global and DCP for policy analysis, we explore the implications of the Euro rivaling the US dollar as a second dominant currency in global trade. According to ECB-Global, in such a scenario the global spillovers from US shocks are smaller, while those from euro area shocks are amplified; domestic euro area monetary policy effectiveness is hardly affected by the Euro becoming a second globally dominant currency in trade.
    Keywords: global macroeconomic modelling,dominant currency paradigm,spillovers
    JEL: F42 E52 C50
    Date: 2019
  7. By: Yuanyan Sophia Zhang
    Abstract: Wage rises have remained stubbornly low in advanced Europe in recent years, but, at the same time, newer EU members are experiencing rapid wage acceleration. This paper investigates the drivers of this wage divergence. Econometric analysis using error correction models suggests that wage growth responds more quickly to changes in unemployment in the newer EU members than in advanced Europe, where wages are more closely related to inflation and inflation expectations in the short run, implying greater inertia in nominal wage rises in advanced Europe. In the years after the global crisis, this inertia contributed to the build up of a real wage overhang relative to sharply slowing labor productivity, which subsequently dragged on nominal wage rises even as unemployment began to decline. Spillovers of subdued wage growth between euro area countries also weighed on wage rises in advanced Europe.
    Date: 2019–07–19
  8. By: Belke, Ansgar; Klose, Jens
    Abstract: This article compares two types of monetary policy rules - the Taylor-Rule and the Orphanides-Rule - with respect to their forecasting properties for the policy rates of the European Central Bank. In this respect the basic rules, results from estimated models and augmented rules are compared. Using quarterly real-time data from 1999 to the beginning of 2019, we find that an estimated Orphanides-Rule performs best in nowcasts, while it is outperformed by an augmented Taylor-Rule when it comes to forecasts. However, also a no-change rule delivers good results for forecasts, which is hard to beat for most policy rules.
    Keywords: Taylor-Rule,Orphanides-Rule,monetary policy rates,forecasting,European Central Bank
    JEL: E43 E52 E58 C53
    Date: 2019
  9. By: Filippo Bontadini (SPRU, University of Sussex, UK/OFCE, Nice); Rinaldo Evangelista (University of Camerino); Valentina Meliciani (University Luiss Guido Carli, Department of Management); Maria Savona (SPRU, University of Sussex, UK)
    Abstract: This chapter aims at revisiting the empirical evidence on the recent trends of countries’ integration in global value chains in Europe. It investigates two potential sources of unbalances that these processes might relate to: (i) the sectoral specialization of the patterns of international fragmentation, whether high technology manufacturing or knowledge intensive services (KIBS); (ii) the occupational categories that have benefited or been penalized by these trends. A rich empirical mapping of these trends in the European countries is provided, based on OECD ICIO and EU ISCO data. The results on the overall and sectoral-specific trends of integration in GVCs and the associated changes in the shares of managers and manual workers show a dual-speed and qualitatively different integration patterns in Europe, with Eastern European (EE) countries rapidly integrating in high tech manufacturing, and the core of western countries strengthening their mutual integration in the KIBS area. Despite the relatively “good quality” integration of EE countries, the evidence does not seem to reveal a mirroring upgrading of employment structures. While this empirical contribution does not attempt to identify causal relationships, the picture provided in the chapter shows that, overall, integration in GVC seems to reproduce and perhaps exacerbate the initial asymmetries in the sectoral and employment structure, with manual workers occupation reducing overall and knowledge intensive occupations concentrating in western Europe.
    Keywords: Global value chains, offshoring, KIBS, High-tech manufacturing, employment, skills
    JEL: J24
    Date: 2019–08
  10. By: Juan Carlos Cuestas
    Abstract: The aim of this paper is to shed some light on the degree of sustainability of fiscal debt for a group of Central and Eastern European countries. We apply a battery of time series econometrics methods to show how the financial crisis has affected the debt-to-GDP ratio and how the ratio has behaved recently. The results give us important insights into how governments in Central and Eastern Europe have reacted to the accumulation of debt. We distinguish between two groups of countries; one group where the sovereign debt stock stabilised after the crisis, and another where debt has been accumulated more quickly in recent years. The results provide important policy lessons for the authorities responsible
    Keywords: Central and Eastern Europe, structural breaks, European integration
    JEL: C22 F15
    Date: 2019–01–23
  11. By: Rose Cunningham; Vikram Rai; Kristina Hess
    Abstract: We investigate the extent to which excess supply (demand) in labour markets contributes to a lower (higher) growth rate of average nominal wages for workers. Using panel methods on data from 10 advanced economies for 1992–2018, we produce reduced-form estimates of a wage Phillips curve specification that is consistent with a New Keynesian framework. We find comparable effects on nominal wage growth from several indicators of “slack” in the labour market: unemployment rates, unemployment rate gaps, the prime-age employment-to-population ratios, a composite labour market indicator constructed using a principal component for a wide range of labour force data, and unemployment rates separated by duration of unemployment. Our results provide evidence that while the slope of the wage Phillips curve seems to have become flatter following the global financial crisis in 2008, the relationship still appears to be highly significant. We find that the long-term unemployment rate (unemployment longer than six months) has had a larger effect on wage growth in the period since 2008. We also investigate the shape of the Phillips curve and find some evidence of a convex relationship between labour market slack and nominal wage growth, particularly for the pre-crisis period. Piecewise regressions suggest some mixed evidence on nominal rigidities in the aggregate data.
    Keywords: Inflation and prices; Labour markets; Monetary Policy
    JEL: C33 E31 E32
    Date: 2019–08
  12. By: Pham, Binh Thai (Universitat Autònoma de Barcelona); Sala, Hector (Universitat Autònoma de Barcelona)
    Abstract: This paper connects two salient economic features: (i) Fiscal shocks have asymmetric effects across business cycle phases (Gechert et al., 2019); (ii) Okun's coefficient is time varying and may be unstable. The intertwined dynamic behavior of fiscal shocks and unemployment-output trade-offs are studied in this paper using state-of-the-art TVP-VAR modelling techniques applied to the analysis of six selected economies: France, Japan, Spain, Sweden, the United Kingdom (UK), and the Unites States of America (USA). We confirm the heterogeneity of Okun's coefficient across country, and its time-varying nature across time, showing in addition its fluctuation around a reference long-run value. We document a significant short-run impact of fiscal shocks on Okun's trade-off which, based on the experience of the Global Financial Crisis, becomes larger in periods of economic turmoil. Okun's coefficient is most volatile in Spain and most stable in Sweden and Japan, with France, UK and USA in between. Policy wise, we claim that austerity policies may have unexpected adverse effects on job creation if implemented during slumps, precisely when the labor market sensitivity with respect to the performance of the product market is likely to be more acute.
    Keywords: fiscal shocks, Okun's coefficient, business cycle, austerity, TVP-VAR
    JEL: E24 E32 E62
    Date: 2019–07
  13. By: Obst, Thomas
    Abstract: This paper estimates Okun's law in the EU15 countries between 1980 and 2018. It employs three different versions of the law with a focus on the dynamic part of the relationship. We find that the negative relationship between unemployment and output holds for most countries and is fairly stable over time. However, Okun's coefficient varies substantially across countries. The dynamic version can shed light on the different country estimates found in the literature and is useful to assess the stability of the law. The paper argues that lag effects need to be taken into account to avoid possible misspecification of the short run unemployment-output relationship. A mixed lag structure indirectly controls for missing explanatory variables and includes possible asymmetries.
    Keywords: Okun's law,unemployment,growth,dynamic modelling,cycles
    JEL: E24 C22 E32
    Date: 2019
  14. By: Mario Izquierdo (Banco de España); Enrique Moral-Benito (Banco de España); Elvira Prades (Banco de España)
    Abstract: We explore the propagation of sector-specific shocks through the Spanish input-output network. First, we outline a theoretical framework borrowed from the networks literature that allows us to distinguish between downstream (from suppliers to customers) and upstream (from customers to suppliers) propagation depending on the nature of the shocks considered, either supply- or demand-driven. Second, we compute industry-specific domestic multipliers and compare the propagation features of the Spanish production network with those of other countries using the National Input-Output Tables (NIOTs) for the year 2014. According to our findings, the electricity sector in Spain is the most systemic industry in terms of its economy-wide impact, which is significantly larger than in other European countries. We also find that the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) in the second half of 2018 and its propagation through input-output linkages might have a larger aggregate impact in Germany than in Spain.
    Keywords: input-output tables, networks, shock propagation
    JEL: F14 F15
    Date: 2019–08
  15. By: Sondermann, David; Zorell, Nico
    Abstract: Macroeconomic imbalances increase the vulnerability of an economy to adverse shocks, which in turn can lead to crises with severe economic and social costs. We propose an early warning model that predicts such crises. We identify a set of macroeconomic indicators capturing domestic and external imbalances that jointly predict severe recessions (i.e. growth crises) in a multivariate discrete choice framework. The approach allows us to quantify an economy's macroeconomic vulnerabilities at any point in time. In particular, the model would have pointed early on to emerging vulnerabilities in all the euro area countries that registered severe recessions in the years after 2007. We also show that the model can be applied beyond the euro area crisis in that its main results remain robust to changes in assumptions and sample composition. JEL Classification: E37, E44, F47, O52
    Keywords: early warning models, growth crises, macroeconomic imbalances
    Date: 2019–08
  16. By: Yin-Wong Cheung (City University of Hong Kong); Sven Steinkamp (Universität Osnabrück); Frank Westermann
    Abstract: We use two measures to study two capital flight channels for Germany. One measure is based on the concept of trade misinvoicing and one on net claims and liabilities in the Eurosystem of central banks. For both measures, we propose refinements to enhance the assessment of capital flight. We find that capital flight towards Germany via these two channels has been quite sizable in the recent decade and can tally to about 2% of GDP annually. Regarding their determinants, we show that the two capital flight measures are driven by both common and measure-specific factors. Traditional determinants such as covered interest differentials only play a limited role, while crisis-specific factors such as economic policy uncertainty, the ECB collateral policy, as well as currency misalignment are driving factors of the investors’ apparent flight-to-safety behavior.
    Keywords: Illicit Capital Flight; Trade Misinvoicing; TARGET2 Balance; Flight-to-safety; Economic Policy Uncertainty
    JEL: F3 F32 G15
    Date: 2019–08–08

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