nep-eec New Economics Papers
on European Economics
Issue of 2019‒09‒02
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A European safe asset to complement national government bonds By Giudice, Gabriele; de Manuel Aramendía, Mirzha; Kontolemis, Zenon; Monteiro, Daniel P.
  2. REVISITING THE ECONOMIC CASE FOR FISCAL UNION IN THE EURO AREA By Berger, Helge; DellAriccia, Giovanni; Obstfeld, Maurice
  3. A tentative exploration of the effects of Brexit on foreign direct investment vis-à-vis the United Kingdom By Ana de Almeida; Duncan Van Limbergen; Marco Hoeberichts; Teresa Sastre
  4. Inspecting the Mechanism of Quantitative Easing in the Euro Area By Ralph S. J. Koijen; Francois Koulischer; Benoit Nguyen; Motohiro Yogo
  5. Euro area fiscal policy changes: stylised features of the past two decades By Cláudia Braz; Nicolas Carnot
  6. The new ESCB methodology for the calculation of cyclically adjusted budget balances: an application to the Portuguese case By Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj
  7. Economic consequences of high public debt and challenges ahead for the euro area By Maria Manuel Campos; Cristina Checherita-Westphal; Pascal Jacquinot; Pablo Burriel; Francesco Caprioli
  8. The Three Meaningful Votes: Voting on Brexit in the British House of Commons By Aidt, T.; Grey, F.; Savu, A.
  9. Foreign currency loan conversions and currency mismatches By Fischer, Andreas M; Yesin, Pinar
  10. Testing for breaks in the cointegrating relationship: On the stability of government bond markets’ equilibrium By Paulo M.M. Rodrigues; Philipp Sibbertsen; Michelle Voges
  11. Phillips curves in the euro area By Moretti, Laura; Onorante, Luca; Zakipour-Saber, Shayan
  12. The Implications of Brexit for UK and EU Regional Competitiveness By Mark Thissen; Frank van Oort; Philip McCann; Rauel Ortega-Argilés; Trond Husby
  13. ECB, BoE and Fed Monetary-Policy announcements: price and volume effects on European securities markets By Eurico Ferreira; Ana Paula Serra
  14. The Neutrality of Nominal Rates: How Long is the Long Run? By João Ritto; João Valle e Azevedo; Pedro Teles
  15. Monetary Policy Announcements and Expectations: Evidence from German Firms By Enders, Zeno; Hünnekes, Franziska; Müller, Gernot
  16. The RHOMOLO-IO modelling framework: a flexible Input-Output tool for policy analysis By Giovanni Mandras; Andrea Conte; Simone Salotti

  1. By: Giudice, Gabriele; de Manuel Aramendía, Mirzha; Kontolemis, Zenon; Monteiro, Daniel P.
    Abstract: This paper expands the growing literature on common safe assets in the context of the euro area financial system by employing credit risk simulation techniques to investigate the properties of different safe asset models and their impact on national bond markets. The paper explores in particular the E-bonds model, whereby a supranational institution would raise funds in the markets and provide bilateral senior loans to Member States corresponding to a fixed proportion of GDP, complementing the issuance of national government bonds, without risks of mutualisation. The main findings are that E-bonds could reach a volume of 15 to 30% of euro area GDP with a high degree of safety while becoming the reference safe asset for the banking sector, capital markets and monetary policy operations in the euro area. As regards the impact on remaining national bonds, such volumes would be consistent with Germany maintaining its top credit rating. The average funding costs of Member States would remain broadly stable, while marginal funding costs would tend to experience limited increases, which should enhance market discipline.
    Keywords: Safe Assets; Eurozone; EMU Deepening; E-bonds; E-bills; SBBS; ESBies; Banking Union; Capital Markets Union; International Role of the Euro; Sovereign Bonds; Eurobills; Blue Bonds; Purple Bonds; Credit Risk
    JEL: E63 F36 G12 H63
    Date: 2019–08–20
  2. By: Berger, Helge; DellAriccia, Giovanni; Obstfeld, Maurice
    Abstract: After significant progress as an immediate result of the euro crisis, the drive to complete Europe's Economic and Monetary Union (EMU) has decelerated. While there is a broad consensus in Europe that EMU needs further development, the exact nature and timing of the reform agenda remains controversial. This paper makes an analytical contribution to the ongoing discussion about the euro area's institutional setup. An in-depth look at the remaining gaps in the euro's architecture, and the trade-offs that repairing them would present, suggests the need for long-run progress along three mutually supportive tracks. First is more fiscal risk sharing, which will help enhance the credibility of the sovereign "no bailout" rule. Second is complementary financial sector reforms to delink sovereigns and banks. Third is more effective rules to discourage moral hazard. Helpfully, this evolution would ensure that financial markets provide more incentives for fiscal discipline than they do now. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, however, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.
    Keywords: Banking Union; ESM; Euro Area; Optimal Currency Area; Risk Sharing
    Date: 2019–06
  3. By: Ana de Almeida; Duncan Van Limbergen; Marco Hoeberichts; Teresa Sastre
    Abstract: European Union (EU) integration has boosted inward 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 data developments to assess whether the Brexit June 2016 referendum outcome and its aftermath have had an impact 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 preliminary 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 favored 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 and one of its most important non-EU partners, the United States. A different approach is also used to analyze 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 FDI 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 as well in the euro area.
    Date: 2019
  4. By: Ralph S. J. Koijen; Francois Koulischer; Benoit Nguyen; Motohiro Yogo
    Abstract: Using new data on security-level portfolio holdings by investor type and across countries in the euro area, we study portfolio rebalancing during the European Central Bank’s (ECB) purchase programme that started in March 2015. To quantify changes in risk concentration, we estimate the evolution of the distribution of duration, government, and corporate credit risk exposures across investor sectors and regions until the last quarter of 2017. Using these micro data, we show that 60% of ECB purchases are sold by non-euro area investors, and we do not find evidence that risks get concentrated in certain sectors or geographies. We estimate a sector-level asset demand system using instrumental variables to connect the dynamics of portfolio rebalancing to asset prices. Our estimates imply that government yields declined by 47bp, on average, but the estimates range from -28bp to -57bp across countries.
    JEL: E52 F21 G11 G12
    Date: 2019–08
  5. By: Cláudia Braz; Nicolas Carnot
    Abstract: The paper provides a narrative of euro area fiscal policy changes since 1997, the year when Maastricht criteria were met for inception of the euro. Changes in the budget balance are decomposed into a discretionary component, a cyclical component and a net residual, with each component broken down in turn into broad categories of expenditure and revenues. The paper then examines the output effects of fiscal changes. We summarise our findings in six stylised features. In brief, fiscal changes and fiscal effects are relatively large. They stem in similar proportions from discretionary actions and from the automatic stabilisers. Discretionary changes tend to involve both revenue and expenditure measures and do not appear systematically driven by cyclical developments. Fiscal changes as a whole have contributed to smooth the euro area growth path, but mostly due to the automatic stabilisers.
    JEL: E32 E62 H30 H6
    Date: 2019
  6. By: Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj
    Abstract: The analysis of public finance developments relies, amongst other indicators, on estimates of cyclically adjusted budget balances (CABs), which correct headline government balances for business cycle fluctuations. The European System of Central Banks (ESCB) endorsed in late 2018 a new aggregate methodology for the calculation of CABs, developed by Bouabdallah et al., 2019. This paper presents the application of this new cyclical adjustment methodology to the Portuguese case, providing details on the calculation of the underlying fiscal-to-base and base-to-output elasticities. Additionally, it describes the output gap estimations used to assess the cyclical position of the economy. The paper also presents the analytical tool developed by Bouabdallah et al., 2019 to disentangle the drivers of structural fiscal developments, providing details on its application to Portugal.
    JEL: E62 H20 H60
    Date: 2019
  7. By: Maria Manuel Campos; Cristina Checherita-Westphal; Pascal Jacquinot; Pablo Burriel; Francesco Caprioli
    Abstract: The aim of this paper is to reflect on the economic consequences of high public debt and the challenges ahead for the euro area. The paper reviews the economic risks associated with regimes of high public debt through DSGE model simulations and stresses the need for comprehensive solutions to mitigate such risks in the future. While the large public debt build-up following the global financial and economic crisis acted as a shock absorber for output, keeping public debt at high levels is a source of vulnerability in itself, particularly given the arising fiscal and economic pressures from ageing. Moreover, in the euro area, where monetary policy focuses on the area-wide aggregate, countries with high levels of indebtedness are poorly equipped to withstand asymmetric shocks. Looking at the historical evidence, the paper reviews the menu of tools at hand for euro area governments to further reduce their debt ratios. It posits that the urgency of efforts in this respect depends on risks to public debt sustainability. In the context of the broader reform agenda on how to strengthen EMU resilience, the paper acts as a reminder that further risk reduction and institutional reform is needed.
    JEL: E43 E62 H63 O40
    Date: 2019
  8. By: Aidt, T.; Grey, F.; Savu, A.
    Abstract: Why do politicians rebel and vote against the party line when high stakes bills come to the floor of the legislature? We leverage the three so-called Meaningful Votes that took place in the British House of Commons between January and March 2019 on the Withdrawal Agreement that the Conservative government had reached with the European Union to address this question. The Withdrawal Agreement was decisively defeated three times and a major revolt amongst Conservative backbench Members of Parliament (MPs) was instrumental in this. We find that three factors influenced their rebellion calculus: the MP’s own preference, constituency preferences and career concerns. Somewhat paradoxically, the rebellion within the Conservative Party came from MPs who had supported Leave in the 2016 Brexit referendum and from MPs elected in Leave leaning constituencies.
    Keywords: BREXIT, roll call votes, rebellions, party discipline, party coherence, House of Commons
    JEL: D72
    Date: 2019–08–19
  9. By: Fischer, Andreas M; Yesin, Pinar
    Abstract: This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period. Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased bank exposure in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.
    Keywords: currency mismatch; emerging markets; Loan conversion programs
    JEL: F15 F21 F32 F36 G15
    Date: 2019–08
  10. By: Paulo M.M. Rodrigues; Philipp Sibbertsen; Michelle Voges
    Abstract: In this paper, test procedures for no fractional cointegration against possible breaks in the persistence structure of a fractional cointegrating relationship are introduced. The tests proposed are based on the supremum of the Hassler and Breitung (2006) test statistic for no cointegration over possible breakpoints in the long-run equilibrium. We show that the new tests correctly standardized converge to the supremum of a chi-squared distribution, and that this convergence is uniform. An in-depth Monte Carlo analysis provides results on the finite sample performance of our tests. We then use the new procedures to investigate whether there was a dissolution of fractional cointegrating relationships between benchmark government bonds of ten EMU countries (Spain, Italy, Portugal, Ireland, Greece, Belgium, Austria, Finland, the Netherlands and France) and Germany with the beginning of the European debt crisis.
    JEL: C12 C22
    Date: 2019
  11. By: Moretti, Laura (European Central Bank); Onorante, Luca (European Central Bank); Zakipour-Saber, Shayan (Central Bank of Ireland)
    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, weidentify 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.
    Keywords: Phillips curves, Dynamic Model Averaging, nonlinearities, structural changes, density forecast.
    JEL: C30 E52 F41 E32
    Date: 2019–08
  12. By: Mark Thissen (Netherlands Environmental Assessment Agency (PBL)); Frank van Oort (Erasmus University Rotterdam); Philip McCann (Sheffield University); Rauel Ortega-Argilés (University of Birmingham); Trond Husby (Netherlands Environmental Assessment Agency (PBL))
    Abstract: Any form of Brexit will impact heterogeneously in terms of sectors and regions on the competitiveness of firms in both the UK and Europe. The ongoing uncertainty about the conditions under which the UK will be leaving the EU, creates difficulties in structurally estimating these impacts. Using uniquely-detailed interregional trade data on goods and services for the EU, we apply a novel methodology that disentangles region-sector sensitivities (elasticities) of firms’ competitiveness to (non)tariff barriers from the implications of different post-Brexit UK-EU trade scenarios. This enables us to derive the impact of Brexit on the competitiveness of firms along with the degree of uncertainty that surrounds these impacts, independently from the scenarios. Our analysis demonstrates that the adverse international competitiveness shocks on UK firms are much larger than those on the rest of the EU due to the dependency of the UK on the EU via global value chains. The competitiveness shocks mean that within the UK, Brexit is likely to increase both interregional inequalities and also intra-regional inequalities. In contrast interregional inequalities across Europe may actually fall, depending on the nature of the post-Brexit UK-EU trading arrangements.
    Keywords: Brexit, competitiveness, impact analysis, international trade, regional economics, IO analysis
    JEL: P25 R13
    Date: 2019–08–21
  13. By: Eurico Ferreira; Ana Paula Serra
    Abstract: As a response to the recent global financial crisis, the main central banks implemented several programs of unconventional monetary policies. This paper assesses the announcement effects of the policy measures taken by the European Central Bank, the Bank of England and the Federal Reserve on European securities markets. We measure the impact of these announcements on government bond and stock prices and trading volumes. Using the event study methodology, we evaluate the reaction of some of the major European market indices around the announcement dates of unconventional monetary policies, over the period between 2008 and 2016. Our results show that the overall impact of the announcements of unconventional monetary policy measures is significant for European stock markets. Further, results suggest that the impact was more significant with the announcement of “Forward Guidance” and “Asset Purchases” policy measures, respectively, on stock prices and trading volumes. If events are categorized using a narrow definition of “Forward Guidance”, the effects for this category are positive but not always statistically significant.
    JEL: E52 E58 G12 G14
    Date: 2019
  14. By: João Ritto; João Valle e Azevedo; Pedro Teles
    Abstract: How can inflation be raised in economies such as Japan and the euro area where it has been below the objective for quite some time? We estimate an empirical model aimed at identifying the effects of permanent and temporary monetary shocks for the U.S., Japan, France, the U.K., Germany and the euro area. We find that the permanent monetary shock leads to a permanent rise in nominal rates and inflation. Importantly, the short-run effects of this permanent shock are similar to the long-run effects: inflation responds positively and immediately to a permanent rise in nominal rates, confirming the results in Uribe (2017, 2018). We also reinvestigate the long-run relation between inflation and nominal short interest rates. Using data for 41 developed countries covering the last 50 years, we document a strong, yet below one-for-one relationship between nominal rates and inflation, that tends to be less visible over the more recent period, characterized by inflation targeting at low common levels.
    JEL: E31 E32 E52 E58
    Date: 2019
  15. By: Enders, Zeno; Hünnekes, Franziska; Müller, Gernot
    Abstract: We assess empirically whether monetary policy announcements impact firm expectations. Two features of our data set are key. First, we rely on a survey of production and price expectations of German firms, that is, expectations of actual price setters. Second, we observe the day on which firms submit their answers to the survey. We compare the responses of firms before and after monetary policy surprises and obtain two results. First, firm expectations respond to policy surprises. Second, the response becomes weaker as the surprise becomes bigger. A contractionary surprise of moderate size reduces firm expectations, while a moderate expansionary surprise raises them. Large surprises, both negative and positive, fail to alter expectations. Consistent with this result, we find that many of the ECB's announcements of non-conventional policies did not affect expectations significantly. Overall, our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise.
    Keywords: European Central Bank; Firm expectations; information effect; Monetary policy announcements; survey data
    JEL: E3 E52 E58
    Date: 2019–08
  16. By: Giovanni Mandras (European Commission - JRC); Andrea Conte (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: This Technical Report describes the features of the RHOMOLO-IO model and demonstrates its flexibility by showing a number of recent policy-relevant applications for which it has been used. Such applications include, for instance, the study of the European Globalisation Fund, of four TEN-T investment projects, of the European research and innovation regional funds, and of regulatory proposals on the energy union in the EU. The paper contains traditional input-output multipliers analyses applied to output, GDP, and employment, as well as consumption redistribution and trade analyses. The flexibility of the RHOMOLO-IO framework makes it useful for a wide range of policy-relevant studies and makes it a perfect complement to the spatial computable general equilibrium RHOMOLO.
    Keywords: rhomolo, region, growth, input output, multipliers
    JEL: C67 C82
    Date: 2019–08

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