nep-eec New Economics Papers
on European Economics
Issue of 2019‒12‒09
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Quantitative easing and exuberance in stock markets: Evidence from the euro area By Tom Hudepohl; Ryan van Lamoen; Nander de Vette
  2. Populism, Political Risk and the Economy: Lessons from Italy By Pierluigi Balduzzi; Emanuele Brancati; Marco Brianti; Fabio Schiantarelli
  3. Does Central Bank Communication Signal Future Monetary Policy? The Case of the ECB By Hamza Bennani; Nicolas Fanta; Pavel Gertler; Roman Horvath
  4. The Automatisation Challenge Meets the Demographic Challenge: In Need of Higher Productivity Growth By Sandra M. Leitner; Robert Stehrer
  5. Ring-fencing digital corporations: Investor reaction to the European Commission's digital tax proposals By Klein, Daniel; Ludwig, Christopher A.; Spengel, Christoph
  6. Recent improvements to the public finance block of the OECD’s long-term global model By Yvan Guillemette
  7. Are Your Labor Shares Set in Beijing? The View through the Lens of Global Value Chains By Ariell Reshef; Gianluca Santoni
  8. Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates By Petr Hanzlík; Petr Teplý
  9. Immigration and Preferences for Redistribution in Europe By Alberto Alesina; Elie Murard; Hillel Rapoport
  10. Risk, Asset Pricing and Monetary Policy Transmission in Europe: Evidence from a Threshold-VAR approach By Joerg Schmidt
  11. Fiscal federalism and income inequality: An empirical analysis for Switzerland By Feld, Lars P.; Frey, Christian; Schaltegger, Christoph A.; Schmid, Lukas A.
  12. Reevaluating Distributional Consequences of the Transition to Market Economy in Poland: New Results from Combined Household Survey and Tax Return Data By Brzeziński, Michał; Myck, Michal; Najsztub, Mateusz

  1. By: Tom Hudepohl; Ryan van Lamoen; Nander de Vette
    Abstract: In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.
    Keywords: exuberance; asset price bubbles; unconventional monetary policy; quantitative easing
    JEL: G12 G15 E52 E58
    Date: 2019–12
  2. By: Pierluigi Balduzzi (Boston College); Emanuele Brancati (Sapienza University of Rome); Marco Brianti (Boston College); Fabio Schiantarelli (Boston College; IZA)
    Abstract: We study the effects on financial markets and real economic activity of changes in risk related to political events and policy announcements in Italy during the 2013-2019 period that saw the rise to power of populist parties. We focus on events that have implications for budgetary policy, debt sustainability and for Euro membership. We use changes in the Credit Default Swaps (CDS) spreads on governments bonds around those dates as an instrument for shocks to policy and institutional risk – political risk for short – in the context of Local Projections - IV. We show that shocks associated with the rise of populist forces or their policies have adverse and sizable effects on financial markets. These negative effects were moderated by the European institutions and domestic constitutional constraints. In addition, Italian political developments generate international spillover effects on the spreads of other eurozone countries. Finally, political risk shocks have a negative impact on the real economy, although the accommodating stance of monetary policy helped in cushioning them.
    Keywords: populism, political risk, policy uncertainty, sovereign debt, fiscal policy, CDS spread
    JEL: E44 G10 H62 H63
    Date: 2019–12–01
  3. By: Hamza Bennani (Universite Paris Nanterre, 200 Avenue de la République, 92000 Nanterre, France); Nicolas Fanta (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Pavel Gertler (National Bank of Slovakia, Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We examine the European Central Bank's ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication among the members of the European Central Bank's Governing Council between 2008 and 2014, we construct a measure of communication assessing its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication shortly before monetary policy meetings, related to unconventional measures and/or by the ECB President explain the future ECB rate changes well. Overall, these results point to the importance of transparency in understanding the future course of monetary policy.
    Keywords: Central bank communication, ECB, monetary policy
    JEL: E52 E58
    Date: 2019–05
  4. By: Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The future of employment and labour demand growth in the dawning era of intelligent robots and other new technologies is heavily debated. This paper argues that this discussion needs to be complemented by a second trend which has been unfolding in Europe for some time, namely the demographic decline. Various demographic scenarios for many EU countries point towards a significant decline in the working-age population in the near future which puts the functioning of labour markets at risk as labour shortages become increasingly more likely and subsequently threaten economic growth. In this context, this paper gives an overview of recent trends in the growth of real value added, labour productivity and employment as well as of demographic scenarios. Based on these trends, the hypothetical increase of labour productivity growth which would be required to keep real GDP growth at its current level, despite the projected reduction in the workforce, is calculated. Results show that the hypothetical labour productivity growth rate required is about one percentage point higher than the actual growth rate, suggesting that the current labour productivity growth rate in the EU needs to more than double. A complementary econometric analysis shows that even though robots exhibit a positive impact on labour productivity growth, this is not (yet) strong enough to close the gap between the recent and the hypothetical labour productivity trend growth rate which would be required. Disclaimer The paper has been written as part of the DG ECFIN FELLOWSHIP-INITIATIVE 2018-2019 The productivity challenge jobs and incomes in the dawning era of intelligent robots, Ref. 2018 ECFIN 005/B and can also be downloaded from the European Commission's website.
    Keywords: robotisation, ICT capital, productivity, demography
    JEL: J11 O33 O47
    Date: 2019–12
  5. By: Klein, Daniel; Ludwig, Christopher A.; Spengel, Christoph
    Abstract: We study the effect of digital tax measures on firm value. By employing an event study methodology, we analyze investor reaction to the European Commission's proposals on the taxation of digital corporations. Examining the stock returns of potentially affected corporations surrounding the draft directives' release, we find a significant abnormal capital market reaction of -0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. Overall, our study reveals that expectations about ringfencing digital tax measures impact firm values.
    Keywords: digital taxation,corporate tax,digital economy,event study
    JEL: H25 H26 K34 G14
    Date: 2019
  6. By: Yvan Guillemette
    Abstract: This paper documents recent extensions and revisions made to the model underlying the long-run global macroeconomic scenarios that are published every few years. First, a fiscal block is added for 11 countries that previously lacked one. Second, public pension expenditure projections are made endogenous to the projected ratio of retirees to workers and to a hypothesis on the future evolution of benefit ratios. Cross-country differences in projected public pension expenditure thus reflect many factors, including the speed of population ageing, the evolution of employment rates for older people, especially females, and rules regarding the evolution of statutory retirement ages. Third, revised public health expenditure projections introduce a higher income elasticity in middle-income than high-income countries and makes the excess of health care inflation over GDP inflation (Baumol effect) endogenous to the projected labour productivity growth rate. And fourth, the determination of long-term interest rates is revised to associate the fiscal risk premium to net, as opposed to gross, government debt, and make its size conditional on euro area membership, the quality of public governance and the occurrence of systemic banking crises, while allowing a flight-to-safety effect during such crises to lower bond yields in countries that are providers of global safe assets.
    Keywords: interest rates, long-term scenarios, public health expenditure, public pension expenditure
    JEL: E17 E43 H51 H55
    Date: 2019–12–04
  7. By: Ariell Reshef; Gianluca Santoni
    Abstract: We study the evolution of labor shares in 1995-2014 while taking into account international trade based on value added concepts. On average, the decline in labor shares (starting around 1980) accelerates in 2001-2007, after which labor shares recover somewhat. In contrast, skilled labor shares consistently increase. The acceleration in the decline in labor shares is associated with increased intensity of intermediate input exporting; this manifests in a sharp increase in the foreign component in upstreamness of industries and countries in global value chains (GVCs). China's global integration accounts for much of this. Declines in the price of investment together with capital-skill complementarity can explain both the consistent increase in skilled labor shares and the reversal of trend in overall labor shares. Compared to shares in GDP, labor shares in gross national product (GNP) are higher in countries with positive net FDI positions; the uneven spread of multinational activity contributes to greater inequality through this channel.
    Keywords: Labor Share;Skilled Labor Share;Global Value Chains;Offshoring;Vertical Integration
    JEL: E25 F14 F15 F16 F66 J00
    Date: 2019–12
  8. By: Petr Hanzlík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Petr Teplý (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Winston Churchill Sq. 4, 130 67 Prague, Czech Republic)
    Abstract: In this paper, we analyse a relationship between net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature when examining a large sample of annual data on 629 banks from EU member countries during the 2011-2016 period, which also covers the period of zero and negative rates. We test three hypotheses and come to the three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship of NIM with short-term interest rate observed in previous studies, which supports the suspected non-linearity in situation of zero lower bound of interest rates. Contrary to other researchers, we find a negative relationship between NIM and the yield curve slope.
    Keywords: banks, net interest margin, Herfindahl index, interest rates, profitability, system GMM
    JEL: C33 E43 G21
    Date: 2019–03
  9. By: Alberto Alesina; Elie Murard; Hillel Rapoport
    Abstract: We examine the relationship between immigration and preferences for redistribution in Europe using a newly assembled data set of immigrant stocks for 140 regions in 16 Western European countries. Exploiting within-country variations in the share of immigrants at the regional level, we find that native respondents display lower support for redistribution when the share of immigrants in their residence region is higher. This negative association is driven by regions of countries with relatively large Welfare States and by respondents at the center or at the right of the political spectrum. The effects are also stronger when immigrants originate from Middle-Eastern or Eastern European countries, are less skilled than natives, and experience more residential segregation. These results are unlikely to be driven by immigrants' endogenous location choices, that is, by welfare magnet effects or by immigrants' sorting into regions with better economic opportunities. They are also robust to instrumenting immigration with a standard shiftshare approach or to controlling for regional growth prospects.
    Keywords: Income Redistribution;Population Heterogeneity;Welfare Systems;Immigration
    JEL: D31 D64 I3 Z13
    Date: 2019–11
  10. By: Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: This paper investigates in how far monetary policy shocks impact European asset markets, conditional on different risk states. It focuses on four different asset classes: equity of industrial firms, equity of banks, high-grade corporate bonds, and high-yielding corporate bonds. We distinguish between macroeconomic risk, political risk, and financial risk. In a first step, we separately extract three factors via principal component analysis from a set of candidate variables that are assumed to be driven by these latent types of risk. Next, these factors augment a threshold-VAR model that contains assets and a short-rate. Our model is estimated with Bayesian techniques and identified recursively. We illustrate that during periods of severe crisis, different risk regimes coincide. This impedes a clear delimitation among these three types of risk. Further on, impulse responses show that we indeed see state-dependency in the reaction of asset prices to monetary policy shocks. AA-rated corporate bond yields only show minor state-dependency if we distinguish between states of high and macroeconomic or financial risk, but show very pronounced state-dependency for political risk. Their sensitivity to monetary policy shocks is highest if political risk is . Non-investment-grade corporate bond yields as well as equity of industrial firms face the strongest state-dependency when we differentiate between macroeconomic or financial risk. If these risks are high, junk bond yields are very sensitive to monetary policy shocks while the opposite holds for equity of industrial corporations. Surprisingly, financial equity in general reacts positively or insignificant to hikes in short-rates. The positive reaction is most pronounced for states of high financial risk. As a consequence, monetary policy transmission via distinct asset markets highly depends on the degree of these different kinds of risk inherent in European asset markets. This also has strong implications for investors: they have to be aware of this varying degree of sensitivity of asset prices to changes in policy rates as they highly depend on the respective prevailing risk-regime.
    Keywords: state-dependency, asset pricing, monetary policy
    JEL: E44 G12 C11
    Date: 2019
  11. By: Feld, Lars P.; Frey, Christian; Schaltegger, Christoph A.; Schmid, Lukas A.
    Abstract: This paper analyzes the impact of fiscal federalism on income inequality and redistribution. Economic theory delivers contradicting arguments such that empirical evidence is needed to shed light on the relationship. To obtain such evidence, we rely on the ideal institutional setting of federalism in Switzerland. According to our findings, decentralization actually reduces income concentration if jurisdictional fragmentation is limited. We provide evidence that it is crucial to consider the interdependence of decentralization and fragmentation, since the inequality decreasing effect of fiscal decentralization is counteracted by the interaction with jurisdictional fragmentation. Interestingly, it is not redistribution via progressive taxes that drive our results. Instead, we find significant effects in pre-tax income.
    Keywords: Federalism,Decentralization,Inequality,Income Concentration,Top Incomes,Redistribution,Switzerland
    JEL: D31 H23 H77
    Date: 2019
  12. By: Brzeziński, Michał (University of Warsaw); Myck, Michal (Centre for Economic Analysis, CenEA); Najsztub, Mateusz (Centre for Economic Analysis, CenEA)
    Abstract: We use Pareto imputation, survey reweighting, and microsimulation methods applied to combined household survey and tax return data to reevaluate distributional consequences of the post-socialist transition in Poland. Our approach results in the first estimates of top-corrected inequality trends for real equivalized disposable incomes over the years 1994-2015. We find that the top-corrected Gini coefficient grew by 14-26% more compared to the unadjusted survey-based estimates. This implies that over the last three decades Poland has become one of the most unequal European countries among those for which top-corrected inequality estimates exist. The highest-income earners benefited the most during the post-socialist transformation: the annual rate of income growth for the top 5% of the population exceeded 3.5%, while the median income grew by about 2.5%.
    Keywords: income inequality, Gini index, top income shares, tax record, survey data, Pareto distribution, Poland
    JEL: D31 D63 C46 P36
    Date: 2019–10

This nep-eec issue is ©2019 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.