nep-eec New Economics Papers
on European Economics
Issue of 2019‒09‒16
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Understanding low wage growth in the euro area and European countries By Nickel, Christiane; Bobeica, Elena; Koester, Gerrit; Lis, Eliza; Porqueddu, Mario
  2. ECB corporate QE and the loan supply to bank-dependent firms By Betz, Frank; De Santis, Roberto A.
  3. The Impact of the Brexit Vote on EU Multinational Companies By abe harraf
  4. Price Discrimination within and across EMU Markets: Evidence from French Exporters By François Fontaine; Julien Martin; Isabelle Mejean
  5. Forecasting ECB Policy Rates with Different Monetary Policy Rules By Ansgar Belke; Jens Klose
  6. Inflation expectations anchoring: new insights from micro evidence of a survey at high-frequency and of distributions By Nikos Apokoritis; Gabriele Galati; Richhild Moessner; Federica Teppa
  7. Determinants of German outward FDI: variable selection using Bayesian statistical By Mariam Camarero; Laura Montolio; Cecilio Tamarit
  8. The Three Meaningful Votes: Voting on Brexit in the British House of Commons By Toke Aidt; Felix Grey; Alexandru Savu
  9. Fundamental uncertainty about the natural rate of interest: Info-gap as guide for monetary policy By Yakov Ben-Haim; Jan Willem van den End
  10. Did interest rates at the zero lower bound affect lending of com-mercial banks? Evidence for the Euro area By Ansgar Belke; Christian Dreger
  11. Revisiting Intangible Capital and Labour Productivity Growth, 2000-2015: Accounting for the Crisis and Economic Recovery in the EU By Roth, Felix
  12. Diagonal Cumulation and Sourcing Decisions By Pamela Bombarda; Elisa Gamberoni
  13. Measuring household uncertainty in EU countries By Ambrocio, Gene
  14. Council of Economic Advisers: Biased Per Capita Consumption Comparison of the US with Europe By Paul J.J. Welfens
  15. Regulating the doom loop By Alogoskoufis, Spyros; Langfield, Sam
  16. French Households’ Portfolio: The Financial Almost Ideal Demand System Appraisal By Sanvi Avouyi-Dovi; Christian Pfister; Franck Sédillot

  1. By: Nickel, Christiane; Bobeica, Elena; Koester, Gerrit; Lis, Eliza; Porqueddu, Mario
    Abstract: Despite notable improvements in the labour market since 2013, wage growth in the euro area was subdued and substantially overpredicted in 2013-17. This paper summarises the findings of an ESCB expert group on the reasons for low wage growth and provides comparable analyses on wage developments in the euro area as a whole and in individual EU countries. The paper finds that cyclical drivers, as captured by a standard Phillips curve, seem to explain much of the weakness in wage growth during this period, but not all of it. Going beyond the drivers included in standard Phillips curves, other factors are also found to have played a role, such as compositional effects, the possible non-linear reaction of wage growth to cyclical improvements, and structural and institutional factors. In order to increase the robustness of wage forecasts, the paper also proposes ready-to-use tools for cross-checking euro area wage growth forecasts based on wage Phillips curves. These are derived based on a comprehensive real-time forecast evaluation exercise JEL Classification: J30, E24, E31, E32
    Keywords: business cycles, forecasting, structural factors, wages
    Date: 2019–09
  2. By: Betz, Frank; De Santis, Roberto A.
    Abstract: Using a representative sample of businesses in the euro area, we show that Eurosystempurchases of corporate bonds under the Corporate Sector Purchase programme (CSPP)increased the net issuance of debt securities, triggering a shift in bank loan supply infavour of firms that do not have access to bond-based financing. Identification comes frommatching bank-dependent firms to their lenders and accounting for the effect of CSPPon banks’ activity in the syndicated loan market. In a difference-in-differences setting,we show that credit access improved relatively more for firms borrowing from banksrelatively more exposed to CSPP-eligible firms. Unlike in previous studies, this resultapplies regardless of bank balance sheet quality as measured by Tier 1 and NPL ratios. JEL Classification: E52, E58, G01, G21, G28
    Keywords: corporate sector purchase programme, ECB, loan supply, Unconventional monetary policy
    Date: 2019–09
  3. By: abe harraf (University of Northern Colorado)
    Abstract: The Brexit vote and its final outcome on EU multinational companies that are operating in United Kingdom is predicted to have adverse economic and financial outlook for the country. Such consequences could be broken down into three profound impacts: financial, economic and legal, and labor mobility. Financial implications are expected to be harmful in the form of higher business and administrative costs, decrease in foreign direct investment (FDI) in the United Kingdom, and fallout for some selected industries. Economic and legal consequences of the vote are equally inevitable to take a toll on the country and its businesses that their business operation are closely tied to other EU countries. The Brexit would potentially cause an increase in the trading costs for EU multinational companies, looking to engages in international trade while operating in the UK. Moreover, the economic effects of the Brexit vote could potentially result in inflation and increase in the costs of imported goods for United Kingdom residents. Further negative economic implications such as volatility of the English Pound and of the economy in the short-term might result. In addition, leaving EU will likely result in reduced labor mobility and immigration, devastating Britain businesses due to an increased labor cost that are further challenged with the aging population that is prevalent in the most of the western Europe economies. Such difficulties will likely result in the major multinational corporations to opt to forego their operations in the United Kingdom and move their headquarters and business enterprises to another European country. Through the exploration of these potentially harmful impacts on the Great Britain economy, the paper attempts to support the hypothesis that Brexit initiative would have many unintended consequences that could devastate the Great Britain economy for some time.
    Keywords: Brexit, European Union, International Trade
    Date: 2019–06
  4. By: François Fontaine; Julien Martin; Isabelle Mejean
    Abstract: We study the cross-sectional dispersion of prices paid by EMU importers for French products. We document a significant level of price dispersion both within product categories across exporters, and within exporters across buyers. This latter source of price discrepancies, sellers' price discrimination across buyers, is indicative of deviations from the law-of-one price. Price discrimination (i) is substantial within the EU, within the euro area, and within EMU countries; (ii) has not decreased over the last two decades; (iii) is more prevalent among the largest firms and for more differentiated products; (iv) is lower among retailers and wholesalers; (v) is also observed within almost perfectly homogenous product categories, which suggests that a non-negligible share of price discrimination is triggered by heterogeneous markups rather than quality or composition effects. We then estimate a rich statistical decomposition of the variance of prices to shed light on exporters' pricing strategies.
    JEL: F1 F14 F4
    Date: 2019–09
  5. By: Ansgar Belke; Jens Klose
    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 European Central Bank. In this respect the basic rules, results from estimates 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: 2019–06
  6. By: Nikos Apokoritis; Gabriele Galati; Richhild Moessner; Federica Teppa
    Abstract: We shed new light on the anchoring of long-term euro area inflation expectations since the crisis by using micro evidence from a new survey at high (weekly) frequency. We find that long-term inflation expectations remained well anchored to the ECB's inflation aim, which has acted as a focal point. By contrast, we find no evidence that professional forecasts (reported by Consensus Economics) acted as focal points. But there are subtle signs of long-term inflation expectations not being perfectly well-anchored. Using measures based on the distribution of inflation expectations from a quarterly survey, namely uncertainty based on the full distribution, the probability of expected long-term inflation lying between 1.5% and 2.5%, and the effect of short-term on long-term deflation risk, we find that long-term euro area inflation expectations have remained well-anchored, and have become better-anchored between 2011 and 2018.
    Keywords: inflation expectations
    JEL: E31 E58
    Date: 2019–09
  7. By: Mariam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Laura Montolio (University of Valencia, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: This paper provides new evidence on the drivers of German outward foreign direct investment (FDI) stocks for the period 1996-2012. In contrast to previous empirical studies, we adopt a Bayesian model averaging (BMA) approach for a robust selection of those variables. We find evidence that determinants that are associated with horizontal FDI appear to be dominant for explaining bilateral FDI with developed countries while for the group of developing countries covariates associated with vertical FDI motives play a larger role. Within Europe, while the majority of FDI is horizontally driven in “core" countries, for peripheral ones the vertical motivation for FDI seems to prevail. Moreover, our results are compatible with more complex FDI models where vertical determinants and institutional variables are gaining prominence, in parallel with the development of global value chains (GVC). Our results can provide hints for policymakers’ strategies to attract German investment.
    Keywords: FDI determinants; Outward Foreign Direct Investment; Germany; Bayesian Model Averaging; Variable selection
    JEL: F21 F23 C11 C52
    Date: 2019–09
  8. By: Toke Aidt; Felix Grey; Alexandru Savu
    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
  9. By: Yakov Ben-Haim; Jan Willem van den End
    Abstract: In this paper we assume that the natural rate of interest is fundamentally uncertain. Based on a small scale macroeconomic model, info-gap theory is used to rank different monetary policy strategies in terms of their robustness against this uncertainty. Applied to the euro area, we find that a strategy that is responsive to deviations from the policy targets is more robust against natural rate uncertainty than the historical response of the ECB as reflected in an estimated Taylor rule. An inert or passive monetary strategy is least robust. Our analysis presents a methodology that is applicable in a wide range of policy analyses under deep uncertainty.
    Keywords: Monetary Policy; Monetary Strategy; Knightian uncertainty; info-gaps; satisficing
    JEL: E42 E47 E52
    Date: 2019–08
  10. By: Ansgar Belke; Christian Dreger
    Abstract: The paper examines the bank lending activities of banks in a low interest rate environ-ment. External financing of small- and medium-sized enterprises in the euro area primari-ly takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound.
    Keywords: Bank lending, banking regulation, monetary transmission mechanisms, low interest rate environment
    JEL: E44 E51 E52
    Date: 2019–07
  11. By: Roth, Felix
    Abstract: This paper aims to revisit the relationship between intangible capital and labour productivity growth using the largest, up-to-date macro database (2000-2015) available to corroborate the econometric findings of earlier work and to generate novel econometric evidence by accounting for times of crisis (2008-2013) and economic recovery (2014-2015). To achieve these aims, this paper employs a cross-country growth accounting econometric estimation approach using the largest, up-to-date database available encompassing 16 EU countries over the time-period 2000- 2015. The paper accounts for times of crisis (2008-2013) and of economic recovery (2014-2015). It separately estimates the contribution of three distinct dimensions of intangible capital: i) computerized information, ii) innovative property and iii) economic competencies. First, when accounting for intangibles, the paper finds that these have become the dominant source of labour productivity growth in the EU, explaining 56 percent of growth. Second, when accounting for times of crisis (2008-2013), in contrast to tangible capital, the paper detects a solid positive relationship between intangibles and labour productivity growth. Third, when accounting for the economic recovery (2014-2015), the paper finds a highly significant and remarkably strong relationship between intangible capital and labour productivity growth. This paper corroborates the importance of intangibles for labour productivity growth and thereby underlines the necessity to incorporate intangibles into today's national accounting frameworks in order to correctly depict the levels of capital investment being made in European economies. These levels are significantly higher than is currently reflected in official statistics.
    Keywords: intangible capital,labour productivity growth,crisis,recovery,European Union
    JEL: C23 G01 O34 O47 O52
    Date: 2019
  12. By: Pamela Bombarda; Elisa Gamberoni (Université de Cergy-Pontoise, THEMA)
    Abstract: Products must fulfill predetermined rules of origin (RoOs) to be exported under the preferential access granted by a Free Trade Area (FTA) member. In turn, rules of cumulation (RoCs) establish which countries' inputs qualify when computing the extent of origin of a product. Recent literature shows that restrictive rules of origin affect sourcing decision by reducing imports of intermediate goods from third countries relative to FTA partners. This paper explores the effects of rules of cumulation on trade in intermediate goods using the introduction of the Pan-European Cumulation System (PECS) in 1997. PECS provided the EU FTA's peripheral partners (\Spokes") with the possibility of cumulating stages of production from a larger number of countries to qualify for preferential access to the EU market. Therefore, PECS might have altered EU- centric value chains organization of production resulted from RoOs and bilateral ROC. We estimate a triple difference in difference specification and exploit different control groups. Our results show that the effects of RoCs on trade in intermediates are larger, the stricter the RoO applied to the related final good. Specifically, when switching from bilateral to diagonal cumulation we find a reduction in Spokes' imports of intermediates from the rest of the world relative to those from Spokes themselves, reinforcing value chain connections within the cumulation zone. We also find a reduction in Spokes' imports from the EU15 relative to the rest of the world and the Spokes themselves. Our findings suggest that indeed PECS allowed a reassessment of sourcing decisions: thanks to the possibility to cumulate, peripheral countries re-organized global value chain links.
    Keywords: Intermediate Trade, rules of origin, rules of cumulation, PECS, input-output tables
    JEL: F12 F13 F14 F15
    Date: 2019
  13. By: Ambrocio, Gene
    Abstract: I provide a measure of household uncertainty available for European Union (EU) countries. The measure draws from the same consumer survey data used to construct widely-used consumer sentiment indices. I find that increases in household uncertainty are followed by declines in consumer sentiment and household financial conditions. Using Euro Area-wide indices, I also find that the effects of increases in household uncertainty differ from increases in uncertainty from other sources such as financial markets and economic policy. Notably, household uncertainty shocks are inflationary. These results challenge the notion that (household) uncertainty shocks act like negative demand shocks.
    JEL: C32 D84 E37
    Date: 2019–09–07
  14. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: In October 2018, the US Council of Economic Advisers has published a study entitled the Opportunity Costs of Socialism. That study, with an obvious focus on which reform options should not be considered for the US, looks at per capita consumption levels in 2016 and compares the US with Nordic European countries. The CEA’s conjecture that the US has a 30% lead vis-à-vis most of the Nordic Countries is as misleading as the alleged 18% lead vis-à-vis Norway: If one considers not just the year 2016 in isolation but the concept of an effective lifetime per capita consumption which takes into account the value of leisure time and expected life expectancy plus the transatlantic gap in out-of-pocket health care expenditures relative to income – about 1 point higher in the US than in Western and Northern European countries – the key finding is: Nordic countries (except Norway) face an effective lifetime consumption gap of 12%, not of 30% as claimed by the CEA. Meanwhile, Norway’s effective lifetime consumption actually exceeds that of the US by 2%. While the CEA publication apparently argues that the US should not consider Europe as a point of reference for systemic reforms, the effective lifetime figures for consumption per capita and income per capita suggest just this. The EU should export its Social Market Economy, whereby Asian countries in particular would be wise to study some of the leading EU countries.
    Keywords: US, EU, Comparative Economics, Market Economy, Welfare Analysis
    JEL: N10 D4 I3 P46
    Date: 2019–03
  15. By: Alogoskoufis, Spyros; Langfield, Sam
    Abstract: Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure. JEL Classification: G01, G11, G21, G28
    Keywords: Bank regulation, sovereign risk, systemic risk
    Date: 2019–09
  16. By: Sanvi Avouyi-Dovi; Christian Pfister; Franck Sédillot
    Abstract: Over the last decades, the composition of financial wealth of French households has dramatically changed. We seek explanatory factors for these changes by estimating an extended version of Deaton and Muellbauer (1980) model applied to French households’ portfolio choices. We find that most of the estimated parameters of the benchmark model are in line with economic priors. In particular, wealth and real returns are the key determinants of the long run dynamics of the different asset shares in the portfolio. We use the model to simulate the effect on French households’ portfolio allocation for the replacement in 2018 of the various tax regimes of most financial products with a flat tax on savings income. We find that the flat tax should support investment in equities at the expense of life insurance contracts.
    Keywords: : model, return, saving, wealth.
    JEL: C32 C51 E21
    Date: 2019

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