nep-eec New Economics Papers
on European Economics
Issue of 2019‒10‒14
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Negative interest rates in the euro area: does it hurt banks? By Jan Stráský; Hyunjeong Hwang
  2. The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom By Broadbent, Ben; DiPace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana
  3. Converge and European Value Chains: How Deep Integration Can Reignite Convergence in the EU By Marisa Rama
  4. Macroprudential policy in Poland By Mateusz Mokrogulski
  5. Self-employed income in the OECD countries: some consequencies for functional income distribution By Enrico D'Elia; Stefania Gabriele
  6. What drives implementation of the European Union's policy recommendations to its member countries? By Efstathiou, Konstantinos; Wolff, Guntram B.
  7. Cash is King - Effects of ECB's Conventional and Unconventional Measures By Martin Baumgaertner; Jens Klose
  8. Fiscal distress and banking performance: The role of macroprudential regulation By Balfoussia, Hiona; Dellas, Harris; Papageorgiou, Dimitris
  9. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  10. Forecasting European Economic Policy Uncertainty By Degiannakis, Stavros; Filis, George
  11. Structural Asymmetries and Financial Imbalances By Ivan Jaccard

  1. By: Jan Stráský; Hyunjeong Hwang
    Abstract: The negative interest rate policy (NIRP) has been in place in the euro area since June 2014. While the NIRP can provide additional monetary accommodation in the situation where the neutral rate of interest is most likely negative, there are also unintended consequences for banks’ profitability and potential financial stability risks associated with this policy. The paper assesses the effect of the NIRP on the net interest rate margins of the euro area banks using quarterly consolidated bank level data for some 50 banking groups directly supervised by the Single Supervisory Mechanism. Since our data set extends to 2018, it allows us to examine the period of negative short-term interest rates separately from the period of low, but positive policy rates. The econometric results confirm the effect of the interest rate level on bank profitability and, in some specifications, also suggest an additional negative effect on bank profitability in the period of negative euro area short-term interest rates. This additional effect of the NIRP is the strongest when looking at the disaggregated components of net interest income, i.e. interest income and interest expense. However, the effects are not particularly robust across various profitability measures and tend to disappear when conditioning on macroeconomic variables, such as expected real GDP growth and inflation expectations. Therefore, in line with other existing studies, we find weak evidence of possible negative effects on bank profitability from keeping rates low for an extended period of time. Statistical analysis of the bank-level data also points to an ongoing compression of non-interest income, in particular for the best performing banks, and a slow recovery in return on total assets among all banks over the analysed period.This Working Paper relates to the 2018 OECD Economic Survey of Euro Area( rea-and-european-union-economic-snapshot /)
    Keywords: bank profitability, lower bound, monetary policy, negative rates
    JEL: E43 E52 E58 G21 G28
    Date: 2019–10–14
  2. By: Broadbent, Ben; DiPace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana
    Abstract: The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterize these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualized as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary "sweet spot" for tradable producers before the slowdown in the tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materializes. The negative news about tradable sector productivity also lead to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our Brexit simulations, we provide a quantitative analysis of the UK business cycle.
    Keywords: Brexit; Exchange Rate Adjustment; growth; productivity; Tradable Sector; Trade; UK Economy
    JEL: E13 E32 F17 F47 O16
    Date: 2019–09
  3. By: Marisa Rama
    Abstract: Convergence, the process by which poorer countries ‘catch-up’ to rich ones in terms of real incomes, is at the core of the promise of the European Union and the Eurozone. It was enshrined in the founding treaty of the EU and is at the center of policy-making today. However, after several decades of strong European growth, convergence across many core countries has come to a halt. Policymaking has focused on promoting greater integration between EU countries and in particular within the Eurozone to foster further convergence but the political gridlock has stopped these initiatives from moving forward. Further economic and political integration is not necessary for, and may in fact be orthogonal to, greater convergence in the EU. EU countries have converged at roughly the same rate as non-EU countries since the 1950s, suggesting EU membership is not responsible for convergence. Further, there is no statistically significant difference in the rate of convergence between EA 12 or EA19 members before and after the introduction of the Euro. Finally, many current Eurozone members have converged in the last 10 years suggesting that the Euro structure does not impede convergence. Still, further integration may be desirable in the EU – not least to restore the union to its democratic ideals. The only variable that is associated with greater convergence in European countries is value chain integration, particularly upstream integration. Upstream integration is domestic value added embodied in intermediate exports that are re-processed abroad. High upstream integration indicates strong participation in value chains and integration into regional production networks. The level of upstream integration varies tremendously within the EU, going from 10% of GDP in Spain to 28% of GDP in Estonia. Once we control for the level of upstream integration, the rate of converge in European countries goes from 1.25% to 4.5%. High growth countries are deeply integrated in sub-regional supply chains within Europe. Europe is often thought of as a single supply chain but, in fact, there are several sub-regional supply chains within Europe. These sub-regional supply chains are based on strong bilateral ties between neighboring countries. Participation in one of these supply chains appears to matter more for growth than integration with any particular country (e.g. Germany) or to any specific region. Participation in these supply chains is independent of EU membership – it is due to historical ties and deliberate national policymaking. The EU must put cross-country collaboration at the core Horizon Europe– its €100B mission driven innovation programme – to future-proof European supply chains and reintegrate lagging countries. Horizon Europe is the EU’s bet to become a global technology leader. Leading in technology involves not only innovation but also developing the supply chains of the future that allow innovation to be commercially successful. Horizon Europe will not succeed if innovation spending continues occur in national siloes as it did in the Horizon 2020 programme. The EU must pro-actively manage and integrate innovation efforts across the Union and ensure that commercialization occurs at the EU level. Only then can we hope to achieve both EU technological leadership and convergence within the EU.
    Keywords: Economic and Political Integration
    Date: 2019–09
  4. By: Mateusz Mokrogulski (Warsaw School of Economics)
    Abstract: The main objective of this paper is to present macroprudential measures introduced in Poland compared to other EU Member States. Macroprudential policy is applied to strengthen the resilience of the financial system in case of materialisation of systemic risk and to support long-term sustainable economic growth. In Poland a lot of effort has been made to address the problem of Swiss franc loans. Due to increasing risk weights for FX portfolios, banks have to maintain much more capital to address systemic risk compared to domestic-currency portfolios. Other macroprudential policy instruments were set to evaluate the systemic importance of large banks operating in Poland. Nevertheless, supervisory authorities from Central and Eastern European countries do not have full flexibility in implementing macroprudential policy instruments.
    Keywords: macroprudential policy, capital buffer, risk weights, banking sector, systemic risk, financial stability
    JEL: D04 G21 G28
    Date: 2019–10
  5. By: Enrico D'Elia; Stefania Gabriele
    Abstract: Functional income distribution can be an important driver of inequality. When the market remuneration of labour and capital is very uneven across individuals, as they have been in recent decades, the personal distribution of income tends to polarise, jeopardising social cohesion. This explains a renewed interest in functional distribution. Nevertheless, the role of self-employed income has been often misunderstood in estimating factor income shares. National accounts provide estimates of the compensation of employees and the operating surplus, but do not refer to self-employed workers as a specific productive factor, implicitly including their income in the ‘mixed income’ aggregate and in some other minor items. Most analysts estimate the income of self-employed workers by attributing to them the average unit compensation of the employees, although in fact this is not necessarily consistent with the GDP estimates. Other estimates take a fixed share of the ‘mixed income’, usually the same for every country. When national accounts are very detailed, as in the case of Italy, under some assumptions it is possible to accurately estimate self-employment income from sectors’ non-financial accounts. In this paper we analyse four estimation approaches for self-employed incomes, since only the total amount of ‘mixed income’ received by households is available for most countries. We analyse the data of the OECD countries focusing mainly on eight large economies: the US, Japan, the UK, Germany, France, the Netherlands, Spain and Italy. The results are somehow unexpected. First of all, evaluating the income of the self-employed properly, the overall labour share is declining much faster than reported by the official data in some countries, and more countries showed a decrease in the 2000s. Indeed, the real unit compensation of the self-employed declined significantly in most of the eight countries (and in some of the others) after the mid or the end of the nineties, since self-employment has been used extensively to reduce the overall labour cost. Unit labour cost (ULC) also increased much slower (or even declined more) after 2000 in most countries, shedding new light on the pattern of international competitiveness and the drivers of inflation. The share of operative surplus of non-financial and financial corporations, properly recalculated, has exhibited different dynamics, whereas the component related to imputed rentals of owner occupied houses played an unexpectedly important role. Finally, the mark-up on variable production costs has been higher than expected and its evolution has been faster in most countries than what reported before, showing a lower sensitivity to the business cycle.
    Keywords: Functional distribution, labour income, self-employed workers, ULC, mark-up
    JEL: E25 E24 O47
    Date: 2019–10
  6. By: Efstathiou, Konstantinos; Wolff, Guntram B.
    Abstract: We use a newly-compiled dataset to investigate whether and why European Union countries implement the economic policy recommendations they receive from the EU. We find that implementation rates are modest and have worsened at a time when the economic environment has improved and market pressure on sovereigns has subsided. Implementation has deteriorated in particular among countries designated as having 'excessive' macroeconomic imbalances. We then empirically test three factors that could influence implementation rates: (i) the macroeconomic environment; (ii) pressure from financial markets; and (iii) the strength of EU-level macroeconomic surveillance. The econometric estimates indicate that larger fiscal and current account deficits and a higher probability of sovereign default increase the likelihood of implementation. However, stronger surveillance under the Macroeconomic Imbalances Procedure (MIP) does not seem to drive implementation rates. The quality of governance, the fragmentation of government coalitions and fewer recommendations received are connected to increased implementation, whereas for countries under the MIP, implementation slowed during election years. Finally, recommendations on financial services have a much greater chance of being implemented, whereas those on broadening the tax base, the long-term sustainability of public finance and pension systems, and competition in services are much less likely to be implemented. Overall, economic fundamentals and political economy factors provide only a small part of the answer to the question of why countries reform: ultimately, reform decisions are down to factors outside of the models.
    Date: 2019–09
  7. By: Martin Baumgaertner (THM Business School); Jens Klose (THM Business School)
    Abstract: In this paper we distinguish the responses of conventional and unconventional monetary policy measures on macroeconomic variables, using a high frequency data set which measures the impact of the ECB's monetary policy decisions. For the period 2002:01 to 2019:06 we show that unconventional and conventional monetary policy measures dffer considerably with respect to inflation. While conventional measures show the expected response, i.e. an interest rate cut increases inflation and vice versa, unconventional measure appear to have no signicant influence. But this holds not for QE, which is found to have similar influence on inflation as conventional interest rate changes.
    Keywords: Unconventional Monetary Policy, High-Frequency Data, ECB
    JEL: E52 E58 C36
    Date: 2019
  8. By: Balfoussia, Hiona; Dellas, Harris; Papageorgiou, Dimitris
    Abstract: Fiscal fragility can undermine a government's ability to honor its bank deposit insurance pledge and induces a positive correlation between sovereign default risk and financial (bank) default risk. We show that this positive relation is reversed if bank capital requirements in fiscally weak countries are allowed to adjust optimally. The resulting higher requirements buttress the banking system and support higher output and welfare relative to the case where macroprudential policy does not vary with the degree of fiscal stress. Fiscal tenuousness also exacerbates the effects of other risk shocks. Nonetheless, the economy's response can be mitigated if macroprudential policy is adjusted optimally. Our analysis implies that, on the basis of fiscal strength, fiscally weak countries would favor and fiscally strong countries would object to banking union.
    Keywords: bank performance; Banking Union; Fiscal distress; Greece; optimal macroprudential policy
    JEL: E3 E44 G01 G21 O52
    Date: 2019–09
  9. By: Jing Cynthia Wu (University of Notre Dame); Ji Zhang (PBC School of Finance, Tsinghua University)
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable framework to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between countries. Empirically, we nd the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    Date: 2019
  10. By: Degiannakis, Stavros; Filis, George
    Abstract: Forecasting the economic policy uncertainty in Europe is of paramount importance given the on-going sovereign debt crisis. This paper evaluates monthly economic policy uncertainty index forecasts and examines whether ultra-high frequency information from asset market volatilities and global economic uncertainty can improve the forecasts relatively to the no-change forecast. The results show that the global economic policy uncertainty provides the highest predictive gains, followed by the European and US stock market realized volatilities. In addition, the European stock market implied volatility index is shown to be an important predictor of the economic policy uncertainty.
    Keywords: Economic policy uncertainty, forecasting, financial markets, commodities markets, HAR, ultra-high frequency information
    JEL: C22 C53 E60 E66 G10
    Date: 2019
  11. By: Ivan Jaccard (European Central Bank)
    Abstract: Many southern European economies experience large capital inflows during periods of expansion that are followed by abrupt reversals when a recession hits. This paper studies the dynamics of capital flows between the North and South of Europe in a two-country DSGE model with incomplete international asset markets. Over the business cycle, the direction of capital flows between the two regions can be explained in a model in which common shocks have asymmetric effects on debtor and creditor economies. This mechanism explains why aggregate consumption is more volatile in the South than in the North and generates a higher welfare cost of business cycle fluctuations in the region that experiences procyclical net capital inflows. We also study the adjustment to asymmetric financial shocks.
    Date: 2019

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