nep-eec New Economics Papers
on European Economics
Issue of 2019‒10‒28
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Single Supervisory Mechanism : competitive implications for the banking sectors in the euro area By Iryna Okolelova; J.A. Bikker
  2. Synchronization Patterns in the European Union By Mattia Guerini; Duc Thi Luu; Mauro Napoletano
  3. Brexit Impacts: Opportunities for German-Irish Trade By Morgenroth, Edgar
  4. Sectoral reallocations, Real estate shocks, and productivity divergence in Europe By Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
  5. Below the Aggregate: A Sectoral Account of the UK Productivity Puzzle By Rebecca Riley; Ana Rincon-Aznar; Lea Samek
  6. Exchange rate pass-through to import prices: Accounting for changes in the Eurozone trade structure By Antonia Lopez-Villavicencio; Valérie Mignon
  7. The Role of ECB Communication in Guiding Markets By Marc Anderes; Alexander Rathke; Sina Streicher; Filip Jan-Egbert Sturm
  8. A new unit root analysis for testing hysteresis in unemployment By Yaya, OlaOluwa S; Ogbonna, Ephraim A; Furuoka, Fumitaka; Gil-Alana, Luis A.
  9. Exchange rate shocks and inflation comovement in the euro area By Danilo Leiva-Leon; Eva Ortega; Jaime Martínez-Martín
  10. The rise of corporate net lending among G7 countries: a firm-level analysis By Davide Villani
  11. Modelling Minskyan financial cycles with fundamentalist and extrapolative price strategies: An empirical analysis via the Kalman filter approach. By Filippo Gusella
  12. Trend, Seasonal, and Sectoral Inflation in the Euro Area By James H. Stock; Mark W. Watson
  13. Identify More, Observe Less: Mediation Analysis: Mediation Analysis Synthetic Control By Mellace, Giovanni; Pasquini, Alessandra
  14. Shocks and labour cost adjustment: evidence from a survey of European firms By Thomas Y. Mathä; Stephen Millard; Tairi Room
  15. The link between labor cost and price inflation in the euro area By Elena Bobeica; Matteo Ciccarelli; Isabel Vansteenkiste
  16. The Exorbitant Privilege of High Tax Countries By Vincent Vicard
  17. The evolution and heterogeneity of credit procyclicality in Central and Eastern Europe By Juan Carlos Cuestas; Nicolas Reigl; Yannick Lucotte
  18. The transmission channels of unconventional monetary policy: Evidence from a change in collateral requirements in France By Anne-Laure Delatte; Pranav Garg; Jean Imbs

  1. By: Iryna Okolelova; J.A. Bikker
    Abstract: This paper investigates the impact of the SSM’s launch on the market power of banks in the large euro area economies. We employ the Lerner index and the Boone estimator, non-structural measures that capture different aspects of competition. Using the results of the Lerner index, we find evidence of the significant decrease in market power for the ECB supervised entities in Austria, France, Germany and Spain. In a similar vein, the Boone indicator points toward an increase in competition among significant supervised entities of Austria, France, Germany, Italy and Spain. The evidence on changes for the total banking sector are mixed, whereas no significant effect is found for the banks remaining under national supervision. We do not find any support for significant increases in the market power of banks in Italy or Spain, suggesting that large increases in concentration do not necessarily result in anticompetitive conduct.
    Keywords: Banking, SSM, competition, market structure, concentration, Lerner Index, Boone indicator
    Date: 2019–01
  2. By: Mattia Guerini; Duc Thi Luu; Mauro Napoletano
    Abstract: We propose a novel approach to investigate the synchronization of business cycles and we apply it to a Eurostat database of manufacturing industrial production time-series in the European Union (EU) over the 2000-2017 period. Our approach exploits Random Matrix Theory and extracts the latent information contained in a balanced panel data by cleaning it from possible spurious correlation. We employ this method to study the synchronization among different countries over time. Our empirical exercise tracks the evolution of the European synchronization patterns and identifies the emergence of synchronization clusters among different EU economies. We find that synchronization in the Euro Area increased during the first decade of the century and that it reached a peak during the Great Recession period. It then decreased in the aftermath of the crisis, reverting to the levels observable at the beginning of the 21st century. Second, we show that the asynchronous business cycle dynamics at the beginning of the century was structured along a East-West axis, with eastern European countries having a diverging business cycle dynamics with respect to their western partners. The recession brought about a structural transformation of business cycles co-movements in Europe. Nowadays the divide can be identified along the North vs. South axis. This recent surge in asynchronization might be harmful for the European Union because it implies countries' heterogeneous responses to common policies.
    Keywords: Business Cycle Synchronization; Random Matrix Theory; European Union.
    Date: 2019–10–21
  3. By: Morgenroth, Edgar
    Abstract: While there is still uncertainty whether and how the UK will leave the EU, a hard or no-deal Brexit is still a possibility. Under such a scenario the EU will impose most favoured nation tariffs on imports from the UK, which will impact on import prices. This will change the relative attractiveness of imports from other EU countries compared to that for imports from the UK. This means that sourcing from alternative markets. This paper considers imports from the UK to Germany and Ireland and the degree to which these can be replaced by Irish or German goods respectively. The analysis uses detailed 6 digit trade data for 2017 in conjunction with the EU-WTO tariffs, which are assumed to be passed through perfectly. The impact of additional transport costs given the longer transport distance is accounted for. The results suggest that there are significant opportunities for trade reorientation with potential in over half of the all the six digit product groups that are currently imported from the UK.
    Keywords: Brexit, trade diversion, market share
    JEL: F13 F14 F17
    Date: 2019–10–17
  4. By: Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
    Abstract: This paper investigates the role of sectoral reallocations in the divergence of productivity in Europe, based on a database for 33 sectors and 14 countries between 1995 and 2015. Using the contribution of sectoral productivity growth to Total Factor Productivity (TFP) at the country level, we highlight that variations in the relative size of sectors - less productive sectors growing relatively to more productive ones - have been at the origin of variable productivity losses in main European countries. Parallel to this divergence, European countries experienced heterogeneous real estate price dynamics, which took the form, in some economies, of massive boom-bust cycles. We investigate real estate shocks as a potential source of sectoral reallocations through a collateral mechanism. These shocks turn out to be a strong driver of productivity divergence between European countries.
    Keywords: Productivity;Sectoral Reallocations
    JEL: D22 F45 R30
    Date: 2019–09
  5. By: Rebecca Riley; Ana Rincon-Aznar; Lea Samek
    Abstract: We analyse new industry-level data to re-examine the UK productivity puzzle. We carry out an accounting exercise that allows us to distinguish general macroeconomic patterns from sector trends and idiosyncrasies, providing a roadmap for anyone interested in explaining the puzzle. We focus on the UK market sector. Average annual labour productivity growth was 2.5 percentage points lower during the period 2011-2015 than in the decade before the financial crisis that began in 2007. We find that several years on from the financial crisis stagnation remains widespread across detailed industry divisions, pointing to economy-wide explanations for the puzzle. With some exceptions, labour productivity growth lost most momentum in those industries that experienced strong growth before the crisis. Three fifths of the gap is accounted for by a few industries that together account for less than one fifth of market sector value added. In terms of why we observe continued stagnation, we find that capital shallowing has become increasingly important in explaining the labour productivity growth gap in service sectors, as the buoyancy of the UK labour market has not been sufficiently matched by investment, although our figures suggest that the majority of the productivity gap is accounted for by a TFP gap. The collapse in labour productivity growth has been more pronounced in the UK than elsewhere, but the broad sector patterns of productivity stagnation are in many respects similar across other advanced economies, emphasising the importance of global explanations for the puzzle. UK industries that saw the biggest reductions in productivity growth tended to be internationally competitive and more dependent on global demand than other industries. They were also industries where productivity is difficult to measure.
    Keywords: productivity, competitiveness, sector studies
    JEL: E22 E23 L60 L70 L80 L90 O47
    Date: 2019–10
  6. By: Antonia Lopez-Villavicencio; Valérie Mignon
    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: 2019–06
  7. By: Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Filip Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are.
    Keywords: Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth
    JEL: E3 E43 E51 E52 E58
    Date: 2019–10
  8. By: Yaya, OlaOluwa S; Ogbonna, Ephraim A; Furuoka, Fumitaka; Gil-Alana, Luis A.
    Abstract: This paper proposes a nonlinear unit root test based on the artificial neural network-augmented Dickey-Fuller (ANN-ADF) test for testing hysteresis in unemployment. In this new unit root test, the linear, quadratic and cubic components of the neural network process are used to capture the nonlinearity in the time-series data. Fractional integration methods, based on linear and nonlinear trends are also used in the paper. By considering five European countries such as France, Italy, Netherland, Sweden, and the United Kingdom, the empirical findings indicate that there is still hysteresis in these countries. Among batteries of unit root tests applied, both the ARNN-ADF and fractional integration tests fail to reject the hypothesis of unemployment hysteresis in all the countries.
    Keywords: Unit root process; Nonlinearity; Neuron network: Time-series; Hysteresis; Unemployment; Europe; Labour market.
    JEL: C22
    Date: 2019–10–19
  9. By: Danilo Leiva-Leon (Banco de España); Eva Ortega (Banco de España); Jaime Martínez-Martín (European Central Bank)
    Abstract: This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries inflation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a flexible empirical framework that is based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the euro/USD account for over 50% of the nominal euro/USD exchange rate fluctuations in more than 1/3 of the quarters over the past six years – especially in turning points periods. Our main results indicate that headline inflation in euro area countries, and in particular its energy-related component, has significantly become more affected by these exogenous exchange rate shocks since the early 2010s, in particular, for the largest economies of the region. While such increasing sensitivity relies solely on a sustained surge in the degree of comovement for headline inflation, it is also based on a higher region-wide effect of the shocks for the case of energy inflation. Instead, purely exogenous exchange rate shocks do not seem to have a significant effect on the core component of headline inflation, which also displays a lower degree of comovement across euro area countries.
    Keywords: exchange rate, inflation, factor model, structural VAR model
    JEL: E31 F3 F41
    Date: 2019–10
  10. By: Davide Villani
    Abstract: In recent decades, corporate net lending has been increasing in several developed countries. This paper discusses the impact of financialisation and income distribution on the level of corporate net lending among G7 countries. We argue that financialisation affects the level of corporate net lending through firms' re-organisation towards a model of accumulation based on the maximisation of “shareholder value” and through the negative impact on investment. Moreover, the reduction in the wage share can increase the capacity of accumulation of liquidity of corporations, increasing the gap between corporate savings and investment, leading to the rise in net lending. We test our hypotheses using panel data of publicly listed non-financial corporations for the period 1990-2015. According to our findings, the process of financialisation has a positive impact on the level of net lending after 2001, while the wage share at the firm-level has a strong negative impact on the level of net lending throughout the whole period.
    Keywords: Net lending, Financialisation, Functional income distribution, Firm-level analysis
    JEL: E21 G30 O16
    Date: 2019–10
  11. By: Filippo Gusella
    Abstract: In this paper we empirically analyse Minskyan financial cycles in asset prices, where the cycles are driven by the presence of two unobserved evaluation price strategies: the fundamentalist and the extrapolative price strategy. To achieve this, we construct a model, that incorporates the two behavioural equations and we investigate the financial cycles via a state space model. Using the Kalman filter, the conditions for the existence of cycles can be evaluated empirically. The model is estimated for four OECD countries using the times series of equity and housing prices over the period 1970-2017 for annual data. We find evidence of cycles in the equity market for the UK, France, Germany and the USA. Regarding housing prices, we find evidence of cyclical fluctuations in the UK, France and the USA but not in Germany. For both the equity market and the housing market, we find the highest price overshooting in the UK and the USA. Our results provide empirical support for the Minskyan theory, highlighting the role of the evaluation effect for an endogenous generation of cyclical phenomena in asset prices.
    Keywords: Minsky cycles, asset prices, financial instability hypothesis, state space model, Kalman Filter
    Date: 2019
  12. By: James H. Stock; Mark W. Watson
    Abstract: An unobserved components model with stochastic volatility is used to decompose aggregate Euro area HICP inflation into a trend, seasonal and irregular components. Estimates of the components based only on aggregate data are imprecise: the width of 68% error bands for the seasonally adjusted value of aggregate inflation is 1.0 percentage points in the final quarter of the sample. Estimates are more precise using a multivariate model for a 13-sector decomposition of aggregate inflation, which yields a corresponding error band that is roughly 40% narrower. Trend inflation exhibited substantial variability during the 2001-2018 period and this variability closely mirrored variation in real activity.
    Date: 2019–10
  13. By: Mellace, Giovanni (Department of Business and Economics); Pasquini, Alessandra (Tor Vergata University)
    Abstract: The synthetic control method (SCM) allows estimation of the causal effect of an intervention in settings where panel data on just a few treated units and control units are available. We show that the existing SCM as well as its extensions can be easily modified to estimate how much of the “total” effect goes through observed causal channels. The additional assumptions needed are arguably very mild in many settings. Furthermore, in an illustrative empirical application we estimate the effects of adopting the euro on labor productivity in several countries and show that a reduction in the Economic Complexity Index helped to mitigate the negative short run effects of adopting the new currency in some countries and boosted the positive effects in others.
    Keywords: MASC; Synthetic Control Method; Mediation Analysis; Causal Channels; Causal Mechanisms; Direct and Indirect Effects
    JEL: C21 C23 C31 C33
    Date: 2019–10–22
  14. By: Thomas Y. Mathä; Stephen Millard; Tairi Room
    Abstract: We use firm-level survey data from 25 EU countries to analyse how firms adjust their labour costs (employment, wages and hours) in response to shocks. We develop a theoretical model to understand how firms choose between different ways to adjust their labour costs. The basic intuition is that firms choose the cheapest way to adjust labour costs. Our empirical findings are in line with the theoretical model and show that the pattern of adjustment is not much affected by the type of the shock (demand shock, access-to-finance shock, “availability of supplies†shock), but differs according to the direction of the shock (positive or negative), its size and persistence. In 2010–2013, firms responding to negative shocks were most likely to reduce employment, then hourly wages and then hours worked, regardless of the source of the shock. Results for the 2008–2009 period indicate that the ranking might change during deep recession as the likelihood of wage cuts increases. In response to positive shocks in 2010–2013, firms were more likely to increase wages, followed by increases in employment and then hours worked suggesting an asymmetric reaction to positive and negative shocks. Finally, we show that strict employment protection legislation and high centralisation or coordination of wage bargaining make it less likely that firms reduce wages when facing negative shocks.
    Keywords: shocks, firms, labour cost adjustment, wages, employment, hours, survey
    JEL: D21 D22 D24
    Date: 2019–10–14
  15. By: Elena Bobeica; Matteo Ciccarelli; Isabel Vansteenkiste
    Abstract: This paper documents, for the first time in a systematic manner, the link between labor cost and price inflation in the euro area. Using country and sector quarterly data over the period 1985Q1-2018Q1 we find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. The dynamic interaction between prices and wages is timevarying and depends on the state of the economy and on the shocks hitting the economy. Our results show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path.
    Date: 2019–10
  16. By: Vincent Vicard
    Abstract: The well documented US excess returns on its net foreign assets is no exception at the world level. Excess returns on foreign assets owe largely to yield differential within the FDI asset class and are correlated to the corporate tax rate for a large sample of countries, consistently with tax motivated profit shifting by multinational corporations. Using French firm level data on dividends and reinvested earnings from foreign affiliates, I provide evidence and quantify the impact of corporate tax avoidance on international asset returns. Profit shifting inflates the investment income balance and accounts for the average 2 percentage points return differential between French FDI assets and liabilities. Missing profts in France, estimated at €36 billions or 1.6% of GDP in 2015, are mostly shifted to EU countries.
    Keywords: Proft Shifting;Multinational Firms;FDI;Investment Income;Tax Avoidance
    JEL: H26 H25 H32 F14 F23
    Date: 2019–03
  17. By: Juan Carlos Cuestas; Nicolas Reigl; Yannick Lucotte
    Abstract: This paper presents empirical estimates of bank credit procyclicality for a sample of 11 Central and Eastern Europe countries (CEECs) for the period 2000Q1–2016Q4. In the first step we estimate a traditional-type panel VAR model and analyse the evolution of credit procyclicality in the CEECs by comparing the impulse response functions for different business cycle periods. The results confirm the existence of credit procyclicality in CEECs and show that procyclicality is higher during boom periods. Furthermore we observe the heterogeneity of credit procyclicality in the different countries in our sample. To explain the cross-country heterogeneity in credit procyclicality we construct an interacted panel VAR model (IPVAR) and analyse whether bank level competition, proxied by the aggregate Lerner index, constitutes a driving force of credit procyclicality. Our findings indicate that bank competition affects credit procyclicality and explains the differences in credit dynamics across CEECs. Specifically we show that the reaction of credit to a GDP shock is on average higher in a less competitive banking market.
    Keywords: credit cycle, business cycle, bank competition, interacted panel VAR, CEEC
    JEL: E32 E51 G20 D40 C33
    Date: 2019–10–14
  18. By: Anne-Laure Delatte; Pranav Garg; Jean Imbs
    Abstract: Using a bank-firm level credit registry combined with firm-level balance sheet data we establish the presence of heterogeneity in the effects of unconventional monetary policy transmission. We examine the consequences of a loosening in the collateral eligibility requirement for credit refinancing in France. The policy was designed to affect bank lending positively. We expect a linear increase in lending and an additional increase in loans to firms with newly acceptable rating. We find a large heterogeneity of the monetary policy transmission including the unexpected reduction of lending by the banks benefiting the most from the policy. These are small, risk-averse banks whose foremost concern after the recession was to strengthen their balance sheets. Banks least affected by the policy respond with a reduction in credit to low risk borrowers in reaction to the change in the market structure. Last we document heterogenous effects of the policy on firms depending on their size.
    Keywords: Unconventional Monetary Policy;Transmission Channels;Corporate Finance;Real Effects of Monetary Policy;Individual Data
    JEL: C55 C58 E44 G21 G32
    Date: 2019–05

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