nep-eec New Economics Papers
on European Economics
Issue of 2019‒11‒18
twenty-two papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Making room for new competitors. A comparative perspective on Italy’s exports in the euro-area market By Silvia Fabiani; Alberto Felettigh; Claire Giordano; Roberto Torrini
  2. On the effects of the ECB’s funding policies on bank lending and the demand for the euro as an international reserve By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; George S. Tavlas
  3. The Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom By Broadbent, Ben; Di Pace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana
  4. External adjustment with a common currency: the case of the euro area By Alberto Fuertes
  5. Synchronization patterns in the European Union By Mattia Guerini; Duc Thi Luu; Mauro Napoletano
  6. Unconventional monetary policy and corporate bond issuance By De Santis, Roberto A.; Zaghini, Andrea
  7. Non-standard monetary policy measures in the new normal By Anna Bartocci; Alessandro Notarpietro; Massimiliano Pisani
  8. Public finance sustainability in Europe: a behavioral model By Gilles Dufrénot; Carolina Ulloa Suarez
  9. Euro Area Sovereign Debt: Restructuring Options By Theresa Arnold; Mitu Gulati; Ugo Panizza
  10. Quantitative Easing and the Term Premium as a Monetary Policy Instrument By Etienne Vaccaro-Grange
  11. Non-performing loans in the euro area: does market power matter? By Maria Karadima; Helen Louri
  12. Accuracy and determinants of self-assessed euro area house prices By Le Roux, Julien; Roma, Moreno
  13. A Primer on Developing European Public Goods By Clemens Fuest; Jean Pisani-Ferry
  14. The impact of Brexit on UK firms By Bloom, Nicholas; Bunn, Philip; Chen, Scarlet; Mizen, Paul; Smietanka, Pawel; Thwaites, Gregory
  15. Money Neutrality, Monetary Aggregates and Machine Learning By Gogas, Periklis; Papadimitriou, Theophilos; Sofianos, Emmanouil
  16. Current account and structural change in European transition economies By Simeon Coleman; Juan Carlos Cuestas
  17. Credit easing versus quantitative easing: evidence from corporate and government bond purchase programs By D’Amico, Stefania; Kaminska, Iryna
  18. The European Fund for Strategic Investments: The Rhomolo-EIB 2019 update By Martin Christensen; Georg Weiers; Andrea Conte; Marcin Wolski; Simone Salotti
  19. Quantile regressions, asymmetric adjustment and crisis: the case of EU real exchange rates By Juan Carlos Cuestas
  20. Trend and cycle shocks in Bayesian unobserved components models for UK productivity By Melolinna, Marko; Tóth, Máté
  21. The LU-EAGLE model with disaggregated public expenditure By Pablo Garcia Sanchez; Alban Moura
  22. Capacity Utilization and the NAIRCU - Evidences of Hysteresis in EU countries By Federico Bassi

  1. By: Silvia Fabiani (Bank of Italy); Alberto Felettigh (Bank of Italy); Claire Giordano (Bank of Italy); Roberto Torrini (Bank of Italy)
    Abstract: Over the last two decades Italy’s intra-euro area export performance has been weak when compared with that of Germany and Spain, but not in relation to France. This paper first tracks the heterogeneous developments in the four countries’ goods exports in the euro-area market across different sub-periods and product categories. It then discusses some potential determinants of these dynamics: price competitiveness and the entry of new competitors, namely China and the Central and Eastern European countries (the “CEE6”), in the euro-area market. By exploiting several datasets and by using different techniques, the paper quantitatively explores the impact of developments in intra-euro area price competitiveness; it analyzes the role played by China and by the CEE6 in displacing the four economies’ exports in the euro-area market and in activating their total exports via the heightened import demand stemming from the new competitors. These effects are found to be heterogeneous across the four countries, and generally more unfavourable for Italy, thereby helping to explain the country’s relative underperformance, at least vis-à-vis Germany.
    Keywords: goods exports, global value chains, competition from low-wage economies, euro area
    JEL: F00 F10 F40 F62
    Date: 2019–11
  2. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: The euro-area financial crisis that erupted in 2009 was marked by negative confidence effects that had both domestic and international ramifications. Domestically, bank lending declined sharply. Internationally, the demand for the euro as a reserve currency fell precipitously. We investigate the effects of ECB policies on banks’ lending, taking account of national and regional spillovers. We also assess the effects of ECB policies on euro reserve holdings. The results suggest that those policies were important for rebuilding confidence, thus supporting both bank lending and the use of the euro as a reserve asset.
    Keywords: euro area financial crisis; monetary policy operations; European banks; spatial panel model
    JEL: E3 G01 G14 G21
  3. By: Broadbent, Ben (Bank of England and Centre for Macroeconomics); Di Pace, Federico (Bank of England); Drechsel, Thomas (London School of Economics and Centre for Macroeconomics); Harrison, Richard (Bank of England and Centre for Macroeconomics); Tenreyro, Silvana (Bank of England, Centre for Macroeconomics, CEPR and London School of Economics)
    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 characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised 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 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 materialises. The negative news about tradable sector productivity also leads 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 analysis, we provide a quantitative analysis of the UK business cycle.
    Keywords: Brexit; small open economy; productivity; tradable sector; UK economy
    JEL: E13 E32 F17 F47 O16
    Date: 2019–08–27
  4. By: Alberto Fuertes (Banco de España)
    Abstract: This paper analyzes the behaviour of the external adjustment path for the four main economies in the euro area. I find a structural break in the behaviour of the net external position at the time of the introduction of the euro for France, Italy and Spain, pointing out that the inception of the common currency changed their external adjustment process. Germany does not show this structural break, being its external position more affected by other events such as the country reunification in 1989. I also find that France and Italy will adjust the net external position mainly through the valuation component, while Germany and Spain will restore their external balance mostly through the trade component. The common currency area could have exacerbated Germany’s net creditor position as the evolution of the euro has reacted to the external adjustment needs of debtor countries such as Italy and Spain.
    Keywords: external adjustment, exchange rate regime, structural breaks, valuation adjustment
    JEL: F31 F33
    Date: 2019–11
  5. By: Mattia Guerini (Scuola Superiore Sant'Anna); Duc Thi Luu; Mauro Napoletano (Observatoire français des conjonctures économiques)
    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 Unio because it implies countries’ heterogeneous responses to common policies.
    Keywords: Business cycle synchronization ; Random matrix theory; European Union
    JEL: E32 F4 F45
    Date: 2019–11
  6. By: De Santis, Roberto A.; Zaghini, Andrea
    Abstract: We assess the effect and the timing of the corporate arm of the ECB quantitative easing (CSPP) on corporate bond issuance. Because of several contemporaneous measures, to isolate the programme effects we rely on one key eligibility feature: the euro denomination of newly issued bonds. We find that the significant increase in bonds issuance by eligible firms is due to the CSPP and that this effect took at least six months to unfold. This result holds even when comparing firms with similar ratings, thus providing evidence that unconventional monetary policy can foster a financing diversification regardless of firms risk profile. JEL Classification: E52, G15, G32
    Keywords: corporate bond market, CSPP, quantitative easing
    Date: 2019–11
  7. By: Anna Bartocci (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic effects of long-term sovereign bond purchases by the central bank in the ‘New Normal’, i.e. in an economy with a low equilibrium real interest rate and a high probability of hitting the zero lower bound (ZLB) on the short-term policy rate. Our analysis is based on the simulations of a dynamic general equilibrium model for the euro area. The main results are the following. First, long-term sovereign bond purchases reacting to a positive inflation gap help stabilize macroeconomic conditions when the monetary policy rate hits the ZLB. Second, these purchases are an effective stabilization tool following positive shocks to the sovereign term premium (financial shocks) and negative shocks to aggregate demand (real shocks). Third, purchases that also react to the long-term rates are effective in the case of recessionary financial shocks but not in the case of recessionary real shocks and fourth, to stabilize the effects of expansionary shocks, the central bank can increase the short-term monetary policy rate according to an ‘aggressive’ Taylor rule, instead of selling long-term sovereign bonds.
    Keywords: euro area, non-standard monetary policy, zero lower bound
    JEL: E31 E32 E58
    Date: 2019–11
  8. By: Gilles Dufrénot (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, Marseille, France & CEPII.); Carolina Ulloa Suarez (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.)
    Abstract: This paper investigates the sustainability of public finances in the European countries since 2002. We provide evidence of heterogenous behaviors among the EU countries and show that, even if they had been forced to focus their fiscal efforts on correcting the deviations of debt from their ceiling -through a correcting mechanism such as the recent TSCG rule-, this would not necessarily have changed the likelihood that debt and deficits become more sustainable. Sources of deviations from stable debt and deficits are related to the macroeconomic environment: the interest-growth differential, momentum dynamics in the sovereign bond markets, how markets react to rising debt.
    Keywords: fiscal rules, euro area, quantile regression, stability
    JEL: C14 C51 C61
    Date: 2019–11
  9. By: Theresa Arnold (McGuire Woods); Mitu Gulati (Duke University Law School); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: Countries with large debts stocks are vulnerable to the vagaries of the markets. Confidence crises can arise out of nowhere, constricting access to the markets. Hence, the question arises as to whether these countries should put in place mechanisms that will help them better prepare for the possibility of crisis. In effect, the choice is whether to buy insurance. The cost of buying such insurance is that the possibility that markets will see the sovereign’s proactive steps to protect against a crisis not as an indication of prudent governance but rather as an indicator that a crisis is imminent. In this article, we use the case of a hypothetical euro area country (Italy) with a large debt stock and a known vulnerability to confidence crises to set forth its options, as of 2019, to anticipate a possible future debt restructuring. It can: do nothing, do a little; and do something substantial.
    Keywords: Sovereign debt, Italy, euro area, restructuring, local law advantage
    JEL: F34 F54 G15 H12 H63 K22
    Date: 2019–11–12
  10. By: Etienne Vaccaro-Grange (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.)
    Abstract: The transmission of Quantitative Easing to aggregate macroeconomic variables through the yield curve is disentangled in two yield channels: the term premium channel, captured by a term premium series, and the signaling channel, that corresponds to the interest rate expectations counterpart. Both yield components are extracted from a term structure model and plugged into a Structural VAR with Euro Area macroeconomic variables in which shocks are identified using sign restrictions. With this set-up, I show how the central bank can use the term premium as a single monetary policy instrument to foster output and prices. However, I also show that there has been a cost channel in the transmission of QE to inflation between 2015 and 2017. This cost channel provides a new explanation as to why inflation has been so muted during this period, despite the easing monetary environment. Finally, a policy rule for the term premium is estimated.
    Keywords: quantitative easing, shadow-rate term structure model, BVAR, sign restrictions
    JEL: C32 E43 E44 E52
    Date: 2019–11
  11. By: Maria Karadima (Athens University of Economics and Business); Helen Louri (Athens University of Economics and Business and London School of Economics HO/EI)
    Abstract: As consolidation in the banking sector has increased impressively in the wake of the global financial crisis, the question of the impact of market power on bank risk has become topical again. In this study we investigate empirically the impact of market power as evidenced by concentration (CR5 and HHI) and (lack of) competition (Lerner indices) on the change in NPL ratios (ÄNPL). We use an unbalanced panel dataset of 646 euro area banks over the period 2005-2017. Since the distribution of ÄNPL is found not to be normal but positively skewed, we employ a penalized quantile regression model for dynamic panel data. We find conflicting results which are in line with the argument that more concentration does not always imply less competition. The results suggest that competition supports stability when NPLs increase but concentration enhances faster NPL reduction. In addition, we find that the effect of bank concentration is stronger in periphery euro area countries while the effect of competition is enhanced in banking sectors with higher foreign bank presence. Finally, bank competition is more beneficial for commercial banks in reducing NPLs than for savings and mortgage banks, while commercial banks are more prone to creating NPLs than the other two bank types. A tentative conclusion of our study could be that post-crisis consolidation facilitates the faster reduction of NPLs, while as the situation normalizes competition discourages the growth of new NPLs. Policy makers should take such findings into account by encouraging consolidation especially in periphery countries but also inserting competition in the banking sector through either regulating anti-competitive behavior or inviting new and/or foreign entrants.
    Keywords: Non-performing loans; Competition; Lerner index; Concentration; Quantile regression; PQRFE estimator; PIVQRFE estimator
    JEL: C23 C51 G21
  12. By: Le Roux, Julien; Roma, Moreno
    Abstract: Using microdata from the second wave of the Household Finance and Consumption Survey, we investigate the accuracy of property values estimated by homeowners - so called “self-assessed” house prices - and explore the drivers of possible deviations of these prices from official hedonic house price indices. We find evidence that euro area homeowners overestimate the value of their properties by around 9%. Across the largest euro area countries, the overestimation lies in a range between 3.2% in Germany and 22% in Italy. Household characteristics, including the level of indebtedness, appear to explain significant discrepancies between hedonic and self-assessed house price indices, while the limited available data related to property characteristics are generally not affecting this gap. For the euro area, we find that higher self-assessed house prices are associated with a mild increase in consumption expenditures. JEL Classification: E31, C21, O18
    Keywords: house prices, micro data, quantile regressions, under/overvaluation, wealth effects
    Date: 2019–11
  13. By: Clemens Fuest; Jean Pisani-Ferry
    Abstract: The EU has mostly been defined as a provider of economic integration amongst participating member states. Its cornerstones have been the removal of obstacles to cross-border flows of goods, services, labour and capital, and the development of common policies that ensure the smooth functioning of an integrated market, be it for trade, competition, infrastructures or consumer protection, to name the main ones only. Even the euro was initially conceived as a natural complement to the internal market and as a trigger for further integration. This policy report from Clemens Fuest (ifo Institute, LMU, EconPol) and Jean Pisani-Ferry (EUI, Bruegel) discusses the case for enhanced provision of European public goods and makes a number of proposals for concrete steps and initiatives.
    Date: 2019
  14. By: Bloom, Nicholas (Stanford University); Bunn, Philip (Bank of England); Chen, Scarlet (Stanford University); Mizen, Paul (University of Nottingham); Smietanka, Pawel (Bank of England); Thwaites, Gregory (LSE Centre for Macroeconomics)
    Abstract: We use a major new survey of UK firms, the Decision Maker Panel, to assess the impact of the June 2016 Brexit referendum. We identify three key results. First, the UK’s decision to leave the EU has generated a large, broad and long-lasting increase in uncertainty. Second, anticipation of Brexit is estimated to have gradually reduced investment by about 11% over the three years following the June 2016 vote. This fall in investment took longer to occur than predicted at the time of the referendum, suggesting that the size and persistence of this uncertainty may have delayed firms’ response to the Brexit vote. Finally, the Brexit process is estimated to have reduced UK productivity by between 2% and 5% over the three years after the referendum. Much of this drop is from negative within-firm effects, in part because firms are committing several hours per week of top-management time to Brexit planning. We also find evidence for smaller negative between-firm effects as more productive, internationally exposed, first have been more negatively impacted than less productive domestic firms.
    Keywords: Brexit; economic uncertainty; policy uncertainty
    JEL: D80 E66 G18 H32
    Date: 2019–08–30
  15. By: Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Sofianos, Emmanouil (Democritus University of Thrace, Department of Economics)
    Abstract: The issue of whether or not money affects real economic activity (money neutrality) has attracted significant empirical attention over the last five decades. If money is neutral even in the short-run, then monetary policy is ineffective and its role limited. If money matters, it will be able to forecast real economic activity. In this study, we test the traditional simple sum monetary aggregates that are commonly used by central banks all over the world and also the theoretically correct Divisia monetary aggregates proposed by the Barnett Critique (Chrystal and MacDonald, 1994; Belongia and Ireland, 2014), both in three levels of aggregation: M1, M2, and M3. We use them to directionally forecast the Eurocoin index: A monthly index that measures the growth rate of the euro area GDP. The data span from January 2001 to June 2018. The forecasting methodology we employ is support vector machines (SVM) from the area of machine learning. The empirical results show that: (a) The Divisia monetary aggregates outperform the simple sum ones and (b) both monetary aggregates can directionally forecast the Eurocoin index reaching the highest accuracy of 82.05% providing evidence against money neutrality even in the short term.
    Keywords: Eurocoin; simple sum; Divisia; SVM; machine learning; forecasting; money neutrality
    JEL: E00 E27 E42 E51 E58
    Date: 2019–07–05
  16. By: Simeon Coleman (School of Business and Economics, Loughborough University, UK); Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: How have the transition economies’ current accounts evolved? How similar are the factors that have influenced their evolution in each of these countries? In this paper, we examine the evolution of the current account in Central and Eastern European countries and the relationship with the main fundamentals. We employ dynamic ordinary least squares (DOLS) and Threshold Estimation methods to examine the relationship with its main fundamentals (i.e., the Real Exchange Rate, Terms of Trade, Investment, Government Consumption and Income). Our results suggest that the long-run determinants of the current account have indeed changed over time. In addition, the threshold cointegrated estimates show that the parameters are dependent on thresholds for certain variables.
    Keywords: Current account, Central and Eastern Europe, structural breaks, European integration.
    JEL: F15 F32
    Date: 2019
  17. By: D’Amico, Stefania (Federal Reserve Bank of Chicago); Kaminska, Iryna (Bank of England)
    Abstract: Using security-level data, we analyse the effects of the Bank of England’s multiple rounds of gilt purchases (aka Quantitative Easing, QE) and its Corporate Bond Purchase Scheme (aka Credit Easing, CE) on corporate bond prices and issuance. This allows direct estimation of (i) QE’s cross-asset supply effects and (ii) the joint supply effects of QE and CE. We show that in the case of QE alone, the pass-through of the gilt supply shock to corporate bond prices is significant, is larger in the longer-run than at announcement, and is often limited to the default-free component of the corporate yield. In the case of the joint conduct of QE and CE, we find that the CE is more effective than QE in reducing credit spreads, especially for higher-rated bonds, and in stimulating corporate bond issuance, which responds quite rapidly to the corporate bond supply shock.
    Keywords: Quantitative easing; Corporate Bond Purchase Scheme; monetary transmission mechanism; corporate bonds
    JEL: E52 E58 E65 G12
    Date: 2019–09–20
  18. By: Martin Christensen (European Commission - JRC); Georg Weiers (European Investment Bank - EIB); Andrea Conte (European Commission - JRC); Marcin Wolski (European Investment Bank - EIB); Simone Salotti (European Commission - JRC)
    Abstract: The European Fund for Strategic Investments (EFSI) is the central pillar of the Investment Plan for Europe. It tackles the post-crisis investment gap in the EU and aims to revive investment in strategic projects in all EU Member States. EFSI was launched jointly by the European Investment Bank (EIB) Group and the European Commission. Every year, policy simulations are carried out using the RHOMOLO-EIB Computable General Equilibrium (CGE) model in order to assess the macroeconomic effects of EFSI-supported operations. This Policy Insight contains the result of the latest set of simulations quantifying the estimated macroeconomic impact on EU GDP and employment of all EFSI-supported operations approved as of June 13, 2019. The EFSI is contributing significantly to job creation and growth. The EIB-JRC estimates suggest that, by 2019, it has already, created more than 1 million jobs (1.7 million by 2022), with a positive contribution to GDP of 0.9% (1.8% by 2022) over the baseline. The results of the analysis highlight the importance of investments for jobs and economic growth.
    Keywords: rhomolo, region, growth, efsi, eib, investments
    JEL: C63 E61 E62
    Date: 2019–10
  19. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: In this paper we contribute to the long literature on determining the real exchange rate by using models that incorporate structural breaks and nonlinearities. We estimate cointegrated dynamic ordinary least squares regressions, Bayesian vector autoregressions (VAR), and interactive panel VARs. We find that the estimated coefficients for the CEECs and for the other member states differ from each other. We also find that the models are different before and after the crisis, and appreciations and depreciations of the RER seem to condition the long run equations for the EU15+2.
    Keywords: Real exchange rates, competitiveness, quantile regression, Bayesian, asymmetric model, structural breaks, European integration
    JEL: C22 F15 F32
    Date: 2019
  20. By: Melolinna, Marko (Bank of England); Tóth, Máté (European Central Bank)
    Abstract: This paper presents a range of unobserved components models to study productivity dynamics in the United Kingdom. We introduce a set of univariate and bivariate models that allow for shocks between the trend and the cycle to be correlated, and use Bayesian sampling techniques to estimate the models. We show that the size of the priors on the trend and cycle shock has an effect on the results, suggesting that a range of priors need to be considered for policy-making purposes. If the prior is set to a smooth trend, then models with little correlation between the trend and cycle shocks are the likeliest to fit the data. On the other hand, if there is a prior belief that the trend shock is allowed to vary relatively freely, the results suggest that there is a negative correlation between trend and cycle shocks to LIK productivity. This is consistent with real-business cycle type narratives, where trend shocks are the main driver of productivity dynamics. Finally, our evidence suggests that the trend productivity growth rate in the UK has been weaker since the financial crisis. There is also a significant positive correlation between shocks to UK trend productivity and those of other advanced economies.
    Keywords: Business cycle; Markov Chain Monte Carlo; productivity puzzle
    JEL: C11 C32 E32
    Date: 2019–09–20
  21. By: Pablo Garcia Sanchez; Alban Moura
    Abstract: We augment the original LU-EAGLE model with disaggregated public expenditure, allowing for (i) a distinction between public consumption and investment expenditures, (ii) complementarity between public and private consumption, (iii) a productive role for public capital, and (iv) separate private and public employment. This extended model embeds a wide range of transmission channels from public expenditures and allows for a detailed analysis of the general-equilibrium effects of public demand in Luxembourg. Model simulations suggest that a rise in public employment induces the strongest GDP response in the short run, while a rise in public investment has the largest effects in the long run. The results also indicate that crowding-out effects through changes in net exports are essential in determining fiscal multipliers for small open economies such as Luxembourg.
    Keywords: DSGE models, open economy models, fiscal policy, Luxembourg
    JEL: C54 E17 E32 E37 E62 F47
    Date: 2019–11
  22. By: Federico Bassi (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless, available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment, labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods.
    JEL: C32 C51 E22 E32 E61
    Date: 2019–10

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