nep-eec New Economics Papers
on European Economics
Issue of 2020‒01‒20
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A Calibration of the Term Premia to the Euro Area By Eric McCoy
  2. Euro Area Fiscal Policy Changes: Stylised Features of the Past Two Decades By Cláudia Braz; Nicolas Carnot
  3. The Intergenerational Dimension of Fiscal Sustainability By Pedro Arévalo; Katia Berti; Alessandra Caretta; Per Eckefeldt
  4. Secular stagnation and core-periphery uneven development in post-crisis eurozone By Alberto Botta; Ben Tippet
  5. Safe haven flows, natural interest rates and secular stagnation: Empirical evidence for euro area countries By Belke, Ansgar; Klose, Jens
  6. Challenges ahead for EMU monetary policy By Christophe Blot; Jérôme Creel; Paul Hubert
  7. Sovereign exposures of European banks: it is not all doom By Martien Lamers; Thomas Present; Rudi Vander Vennet
  8. Wage Developments in the Central and Eastern European EU Member States By Vasily Astrov; Mario Holzner; Sebastian Leitner; Isilda Mara; Leon Podkaminer; Armon Rezai
  9. Exchange Rates and Consumer Prices: Evidence from Brexit By Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
  10. The Impact of Income Inequality on Household Indebtedness in Euro Area Countries By Stefan Jestl
  11. The Global Impact of Brexit Uncertainty By Tarek Alexander Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
  12. Immigration and Wage Dynamics in Germany By Sabine Klinger; Anvar Musayev; Jean-Marc Natal; Enzo Weber
  13. The Elusive Quest for the Holy Grail of an Impact of EU Funds on Regional Growth By Jan Fidrmuc; Martin Hulényi; Olga Zajkowska
  14. Explaining the Shadow Economy in Europe: Size, Causes and Policy Options By Ben Kelmanson; Koralai Kirabaeva; Leandro Medina; Borislava Mircheva; Jason Weiss
  15. Wage Growth and Inflation in Europe: A Puzzle? By Vizhdan Boranova; Raju Huidrom; Sylwia Nowak; Petia Topalova; Volodymyr Tulin; Richard Varghese
  16. Forecasting Unemployment Rates with International Factors By Pincheira, Pablo; Hernández, Ana María
  17. New Evidence on the Size and Drivers of the Shadow Economy in Spain: A Model Averaging Approach By Rios, Vicente

  1. By: Eric McCoy
    Abstract: Credit risk-free long-term interest rates can typically be decomposed into two components: expectations of the future path of the short-term policy rate and the term premium. Changes in term premium are considered to have been an important driver behind developments in long-term bond yields in recent years. As policy rates of major central banks approached their effective lower bound in the aftermath of the global financial crisis, their ability to provide the necessary degree of monetary stimulus using conventional policy measures became very limited. In this particular context, central banks had to move beyond conventional policy instruments and instead deploy a set of unconventional tools (such as large-scale asset purchase programs and forward guidance) that were tailored to target the longer-end of the yield curve. There is a growing body of empirical evidence suggesting that these unconventional measures turned out to be effective in compressing the term premium component of interest rates. This paper, after providing a definition of the term premium and a succinct overview of different ways to measure it, presents the empirical results obtained from calibrating a Gaussian affine term structure (GATSM) based term premia model to the euro area. In addition to discussing the GATSM model’s assumptions and specifications, it also describes the calibration algorithm employed, which is based on genetic algorithms. Thereafter, it provides some insight into the time profile of the euro area term premium in the post global financial crisis (GFC) era and in particular how it has evolved after key ECB policy decisions since 2008.
    JEL: E43 E44 E52 E58
    Date: 2019–09
  2. By: Cláudia Braz; Nicolas Carnot
    Abstract: The paper provides a narrative of euro area fiscal policy changes since 1997, the year when Maastricht criteria were met for inception of the euro. Changes in the budget balance are decomposed into a discretionary component, a cyclical component and a net residual, with each component broken down in turn into broad categories of expenditure and revenues. The paper then examines the output effects of fiscal changes. We summarise our findings in six stylised features. In brief, fiscal changes and fiscal effects are relatively large. They stem in similar proportions from discretionary actions and from the automatic stabilisers. Discretionary changes tend to involve both revenue and expenditure measures and do not appear systematically driven by cyclical developments. Fiscal changes as a whole have contributed to smooth the euro area growth path, but mostly due to the automatic stabilisers.
    JEL: H6 H30 E32 E62
    Date: 2019–09
  3. By: Pedro Arévalo; Katia Berti; Alessandra Caretta; Per Eckefeldt
    Abstract: Most countries, among which EU Member States, use public finances to redistribute resources from the working-age population to the old and the very young so as to smoothen resources over the life cycle of individuals. As the EU is confronted with population ageing, this societal model is facing challenges. This is particularly the case in light of public spending on pension and health care in the EU currently accounting for almost 20% of GDP and expected to remain major public spending items going forward. As such, and against the background of a rising dependency ratio, age-related public spending could lead to increasing tax burdens on future generations. This raises questions of intergenerational equity that cannot be measured by standard budgetary indicators, nor by traditional fiscal sustainability metrics (including the European Commission's fiscal sustainability gap indicators). Generational accounting allows calculating the present value of total net tax payments to the government (taxes paid minus transfers received) over the remaining lifetime of a cohort born in a specific year. Relying on harmonised data and the European Commission projections, including the Ageing Report, this paper estimates the lifetime fiscal burden and its distribution between current and future-born generations for all EU countries, disentangling the underlying determinants. Based on the generational accounts, two indicators measuring intertemporal and intergenerational imbalances are provided, the Intertemporal Budget Gap (IBG) and the AuerbachGokhale-Kotlikoff (AGK) indicators. The paper concludes that public finances in the EU face long-term fiscal sustainability challenges based on current policies and that there are intergenerational issues, entailing a larger adjustment for future generations.
    JEL: E62 H3 H5 H55 H6 I1 I3 J1 J21
    Date: 2019–09
  4. By: Alberto Botta; Ben Tippet
    Abstract: In this paper, we analyse secular stagnation in the eurozone. We adopt a core-periphery perspective, and analyse whether the 2007-2008 financial crisis triggered off diverging dynamics in the growth potential of core and peripheral eurozone countries. We find that secular stagnation affects the whole eurozone, but is a much more serious concern in peripheral countries. Among the components of potential output, the NAIRU shows a worrisome diverging evolution since 2008. It has remained broadly constant in the core whilst doubling in the periphery. We find that the pronounced increase in the NAIRU in the periphery is strongly related to demand-side factors such as investment demand and fiscal consolidation rather than rigid labour market institutions. The negative effect that fiscal contractions may have on the NAIRU is a novel theoretical contribution of this paper. In line with these findings, we argue that reforms in the eurozone should focus on the creation of macroeconomic institutions ensuring convergence in financial and macroeconomic conditions among member countries rather than on the generalised deregulation of labour markets.
    Keywords: None
    JEL: C23 E12 O11 O52
    Date: 2020–01
  5. By: Belke, Ansgar; Klose, Jens
    Abstract: This article introduces a new measure to capture safe haven flows for twelve Euro area countries. Since those flows are suspected to alter the natural rate of interest, which is at the heart of the discussion whether certain countries face a period of secular stagnation, we estimate the natural rate including those flows explicitly. It is shown that adding this measure indeed changes the estimated natural rate and thus the degree of evidence of secular stagnation in various countries. It is found that the natural rate tends to decrease in countries with safe haven inflows and increases in countries with safe haven outflows.
    Keywords: safe haven,portfolio flows,natural interest rate,secular stagnation,Euro area member countries
    JEL: E43 F45 C32
    Date: 2019
  6. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: With the economic slowdown in the euro area, questions arise as to whether the ECB retains some economic and political margins for manoeuvre after a decade of active policies. In this note, we highlight three possible monetary policy developments. We discuss their pros and cons according to four dimensions: political constraints, technical constraints, independence and interactions with fiscal policy.
    Date: 2019–09
  7. By: Martien Lamers; Thomas Present; Rudi Vander Vennet (-)
    Abstract: In this paper we investigate whether or not observed changes in the composition of the sovereign bond portfolios of European banks are determined by a risk-return trade-off. Banks have been shown to disproportionally invest in bonds issued by their domestic sovereign, causing a negative bank-sovereign doom loop. Several motivations for such behavior have been demonstrated in the extant literature, such as e.g., search for yield or moral suasion, which from an investment perspective all involve some degree of irrational behavior. We depart from this approach and investigate the risk-return trade-off in the bank sovereign bond portfolios. We use data from all stress tests and transparency exercises conducted by the EBA between 2011 and 2018 for a sample of 76 European banks. Using the Sharpe ratio for the risk-return assessment, we find that over the entire period banks’ investments and divestments of sovereign bonds are characterized by rational risk-return considerations. Moreover, both bond risk (measured by the standard deviation of bond returns) as well as sovereign risk (sovereign CDS spreads) are negatively related to bond buying, implying that, on average, banks do not engage in excessive risk-taking behavior in their sovereign bond portfolios. Our main conclusion is that over the 2011-2018 period banks may have exhibited spells of excessive risk behavior in their sovereign bond buying, but over the entire period their sovereign bond investments exhibit a sound risk-return trade-off. These findings have implications for policy initiatives to tackle concentrations in sovereign bond holdings by European banks.
    Keywords: Sovereign Exposures, Risk Return, Securities portfolio, Bank balance sheet
    JEL: G11 G18 G21 G28
    Date: 2019–12
  8. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Isilda Mara (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Armon Rezai
    Abstract: Labour markets in the Central and Eastern European member states of the EU (EU-CEE8) have improved significantly since the global economic crisis of 2008-2009. Unemployment rates have declined steadily, primarily due to adverse demographic trends and massive outward migration to the West, which have resulted in a decline in the working-age population. Nevertheless, until recently wage growth in EU-CEE8 was rather restrained, resulting in generally stable wage shares. The so-called ‘Phillips curve’, which represents a negative correlation between unemployment and wage growth, has not held for most of EU CEE8 during this period – unlike, for example, for Austria or Germany. The main reasons for this have been the progressive flexibilisation and liberalisation of the labour markets of EU CEE countries in the years since the economic crisis. In particular, wage negotiation mechanisms have been decentralised and the degree of coverage by collective-bargaining agreements has declined, in some cases dramatically. This has tended to weaken the negotiating position of employees, thereby counteracting the positive effects of the general improvement in the labour market situation. Disclaimer The study was commissioned by the Arbeiterkammer Wien.
    Keywords: wages, wage share, demographic trends, migration, Phillips curve, wage-setting mechanisms
    JEL: J11 J31 J4 J50
    Date: 2019–12
  9. By: Breinlich, Holger (University of Surrey); Leromain, Elsa (UC Louvain); Novy, Dennis (University of Warwick); Sampson, Thomas (London School of Economics.)
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Date: 2019
  10. By: Stefan Jestl (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper examines the impact of income inequality on consumption-related household indebtedness at the household level. Using the first wave of the Eurosystem Household Finance and Consumption Survey data, the analysis sheds light on heterogeneous effects across euro area countries. The results suggest a positive impact of income inequality on consumption-related household indebtedness in a small sample of countries. We further employ a multilevel regression model to also take country’s macroeconomic characteristics into account, such as credit market and welfare state design. In this setting, we find an overall positive impact of income inequality on consumption-related household indebtedness. Disclaimer Funding from the Austrian Federal Ministry of Labour, Social Affairs, Health and Consumer Protection is gratefully acknowledged.
    Keywords: Income Inequality, Keeping Up With The Joneses, Household Indebtedness, Euro Area
    JEL: D12 D14 D31
    Date: 2019–12
  11. By: Tarek Alexander Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
    Abstract: Using tools from computational linguistics, we construct new measures of the impact of Brexit on listed firms in the United States and around the world; these measures are based on the proportion of discussions in quarterly earnings conference calls on the costs, benefits, and risks associated with the UK's intention to leave the EU. We identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate effects of the different types of Brexit exposure on firm-level outcomes. We find that the impact of Brexit-related uncertainty extends far beyond British or even European firms; US and international firms most exposed to Brexit uncertainty lost a substantial fraction of their market value and have also reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects from Brexit (the first moment) should it come to pass. Most prominently, firms expect difficulties from regulatory divergence, reduced labor mobility, limited trade access, and the costs of post-Brexit operational adjustments. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet significantly affected firm actions.
    JEL: D8 E22 E24 E32 E6 F0 G18 G32 G38 H32
    Date: 2020–01
  12. By: Sabine Klinger; Anvar Musayev; Jean-Marc Natal; Enzo Weber
    Abstract: German wages have not increased very rapidly in the last decade despite strong employment growth and a 5 percentage point decline in the unemployment rate. Our analysis shows that a large part of the decline in unemployment was structural. Micro-founded Phillips curves fit the German data rather well and suggest that relatively low wage growth can be largely attributed to low inflation expectations and low productivity growth. There is no evidence – from either aggregate or micro-level administrative data – that large immigration flows since 2012 have had dampening effects on aggregate wage growth, as complementarity effects offset composition and competition effects.
    Date: 2019–12–27
  13. By: Jan Fidrmuc; Martin Hulényi; Olga Zajkowska
    Abstract: We analyze the impact of EU structural and cohesion funds on economic growth of European regions, using 2SLS to tackle the potential problem of endogeneity, and estimating a spatial model to account for inter-regional spillovers. We use the presence of environmentally protected areas (under the European Union’s Natura 2000 program) as instruments for the receipts of funds from the EU Cohesion Policy. We find that the European funds have a significant and positive effect on regional economic growth in the EU. The inter-regional spillovers in the effect of Cohesion Policy on regional growth are found to be important: most of the effect takes place outside of the recipient region rather than inside. However, there is considerable heterogeneity in the effect of Cohesion Policy across individual EU member states: the effect is stronger in the new member states, and weak or negative in the countries hit by the recent austerity measures. Finally, our results confirm the positive impact of institutional quality: improvements in economic development across the EU do not necessarily require only redistribution: institutional reform can also help boost growth performance.
    Keywords: regional aid, growth, environmental conservation, 2SLS, spatial model
    JEL: C21 C36 F36 E62 O11 P48
    Date: 2019
  14. By: Ben Kelmanson; Koralai Kirabaeva; Leandro Medina; Borislava Mircheva; Jason Weiss
    Abstract: This paper examines the drivers, and reestimates the size of shadow economies in Europe, with a focus on the emerging economies, and recommends policies to increase formality. The size of shadow economies declined across Europe in recent years but remains significant, especially in Eastern Europe. In the emerging European economies, the key determinants of shadow economy size are regulatory quality, government effectiveness, and human capital. The paper argues that a comprehensive package of reforms, focused on country-specific drivers, is needed to successfully combat the shadow economy. The menu of policies most relevant for Europe’s emerging economies include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness, as well as improving tax compliance, automating procedures, and promoting electronic payments.
    Date: 2019–12–13
  15. By: Vizhdan Boranova; Raju Huidrom; Sylwia Nowak; Petia Topalova; Volodymyr Tulin; Richard Varghese
    Abstract: Wages have been rising faster than productivity in many European countries for the past few years, yet signs of underlying consumer price pressures remain limited. To shed light on this puzzle, this paper examines the historical link between wage growth and inflation in Europe and factors that influence the strength of the passthrough from labor costs to prices. Historically, wage growth has led to higher inflation, but the impact has weakened since 2009. Empirical analysis suggests that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability. Thus the recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.
    Date: 2019–12–20
  16. By: Pincheira, Pablo; Hernández, Ana María
    Abstract: In this paper we study international linkages when forecasting unemployment rates in a sample of 24 OECD economies. We propose a Global Unemployment Factor (GUF) and test its predictive ability considering in-sample and out-of-sample exercises. Our main results indicate that the predictive ability of the GUF is heterogeneous across countries. In-sample results are statistically significant for Austria, Belgium, Czech Republic, Finland, France, Ireland, The Netherlands, Portugal, Slovenia, Sweden and United States. Robust statistically significant out-of-sample results are found for Belgium, Czech Republic, France, The Netherlands, Slovenia, Sweden and the United States. This means that the inclusion of the GUF adds valuable information to predict domestic unemployment rates, at least for these last seven countries.
    Keywords: Forecasting, unemployment, international factors, time-series models, out-of-sample comparison, nested models.
    JEL: C1 C12 C2 C22 C4 C49 C5 C52 C53 C6 E2 E24 E27 E3 E37 E6 E63 F0 F00 F3 F36 F37 F6 F62 F66 J0 J00 J01 J08 J6 J60 J64
    Date: 2019–12–28
  17. By: Rios, Vicente
    Abstract: This study investigates the evolution of the shadow economy in Spain during the period 1986-2016 using the Currency Demand Approach by means of Bayesian Model Averaging econometric techniques. The results of the empirical analysis suggest that the average share of the underground economy as a percentage of the GDP during 1986-2016 was the 18.2% whereas in 2016, the estimated size was the 11.95%. The estimated figures for the period under consideration are in line with the averaged estimates of previous studies for the same time frame. Nevertheless, a remarkable difference between previous analysis and the estimated pattern stemming from this study is that the size of the shadow economy depicts an inverted U shape time profile, with a marked reduction in the years after the Great Recession. With the estimates of the shadow economy in hand, the importance of the drivers of the shadow economy in Spain is investigated by means of Bayesian Model Averaging methods. The main finding of this analysis is that the key factors driving variations in the size of the shadow economy are the taxes, the level of education and the distribution of employment across sectors.
    Keywords: Shadow Economy, Spain, Currency Demand, Bayesian Model Averaging
    JEL: C11 H11 H26 K42
    Date: 2019–07

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