nep-eec New Economics Papers
on European Economics
Issue of 2020‒02‒10
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Public Debt, Sovereign Spreads and the Unpleasant Arithmetic of Fiscal Consolidations By Minetti, Raoul; Di Pietro, Marco; Marattin, Luigi
  2. Cross-border loan portfolio diversification, capital requirements, and the European Banking Union By Jokivuolle, Esa; Virén, Matti
  3. Economic modelling for the Single Market performance report 2019 By Martin Christensen; Javier Barbero; Paola Rocchi; Andrea Conte; Robert Marschinski; Simone Salotti
  4. Does the lack of financial stability impair the transmission of monetary policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  5. The contribution of intangible inputs and participation in global value chains to productivity performance: Evidence from the EU-28, 2000-2014 By Tsakanikas, Aggelos; Roth, Felix; Caliò, Simone; Caloghirou, Yannis; Dimas, Petros
  6. Perceived vs actual financial crisis and bank credit standards: is there any indication of self-fulfilling prophecy? By Dimitrios Anastasiou; Zacharias Bragoudakis; Stelios Giannoulakis
  7. Exchange Rates and Political Uncertainty: The Brexit Case By P. Manasse; G. Moramarco; G. Trigilia
  8. The Behavioral Economics of Currency Unions: Economic Integration and Monetary Policy By Akvile Bertasiute; Domenico Massaro; Matthias Weber
  9. Structural transformation in the Spanish economy By Omar Rachedi
  10. Banking crisis prediction with differenced relative credit By Kauko, Karlo; Tölö, Eero
  11. Non-linear exchange rate pass-through to euro area inflation: A local projection approach By Roberta Colavecchio; Ieva Rubene
  12. The 2010 Structural-Demographic Forecast for the 2010–2020 Decade: A Retrospective Assessment By Turchin, Peter; Korotayev, Andrey
  13. Productivity growth determinants of differently developed countries: comparative capital input results By Toma Lankauskiene
  14. Banks, Politics and European Monetary Union By Martin Hellwig
  15. Dissecting the Yield Curve: The International Evidence By Andrea Berardi; Alberto Plazzi
  16. Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause Other Bank Asset Reallocation? The Case of the UK By Simone Giansante; Mahmoud Fatouh; Steven Ongena

  1. By: Minetti, Raoul (Michigan State University, Department of Economics); Di Pietro, Marco (Sapienza University of Rome); Marattin, Luigi (University of Bologna)
    Abstract: In response to severe fiscal consolidation policies implemented after the Great Recession and the euro area sovereign debt crisis, many have questioned the effectiveness of fiscal consolidations in reducing the burden of public debt. This paper revisits this fundamental policy debate qualitatively and quantitatively, studying conditions under which primary budget balance changes can successfully reduce government debt-to-GDP ratios. We first illustrate these conditions through a partial equilibrium setting. We then investigate the conditions quantitatively using a medium-scale New Keynesian DSGE model calibrated on periphery countries of the euro area. The analysis highlights the critical role of sovereign spreads in driving the debt-to-GDP dynamics following a restrictive primary balance shock. Fiscal consolidations turn out to successfully reduce the debt-to-GDP even for fairly low elasticities of spreads to fiscal variables. However, their effectiveness is quantitatively moderate and varies crucially with the initial spread level and with the degree of monetary policy accommodation.
    Keywords: debt-to-GDP; debt sustainability; sovereign spreads; fiscal consolidations
    JEL: E60 H63
    Date: 2020–01–29
  2. By: Jokivuolle, Esa; Virén, Matti
    Abstract: We provide preliminary evidence of potential risk reduction benefits from banks’ loan portfolio diversification cross-border within the Euro area. Using aggregate data on banking sector cor-porate loan losses for each Euro area member-state, our estimates suggest that the static diversification benefit could be substantial. The minimum capital needed to withstand the max-imum annual loss from a hypothetical fully diversified Euro area bank loan portfolio over the period 2001-2017 would have been only 40 % of the total capital needed to withstand the maximum losses on a country by country basis. We also calibrate the country-specific loan loss distributions and the Euro area portfolio’s loss distribution to the Vasicek (2002) model, which underlies the Basel framework’s Internal Ratings Based Approach. We find that the im-plied asset correlation parameter of a median country portfolio is about twice as large as that of the fully diversified Euro area portfolio.
    Keywords: pankit,luotot,euroalue
    Date: 2019
  3. By: Martin Christensen (European Commission - JRC); Javier Barbero (European Commission - JRC); Paola Rocchi (European Commission - JRC); Andrea Conte (European Commission - JRC); Robert Marschinski (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: The European Single Market permits free movement of goods and services within the European Union (EU). By stimulating competition and trade, it improves efficiency, it raises quality and helps cutting prices. The European Commission has a strategy in place to unlock the full potential of the Single Market by improving mobility for service providers, facilitating innovation, enabling across-borders retailing, and enhancing EU-wide access to goods and services. This Policy Insight presents the results of the modelling exercises on the macroeconomic effects of a barriers reduction in regulated business services sectors and construction. Simulations made with the RHOMOLO and FIDELIO models suggest that price reductions in relatively small sectors may have sizeable GDP effects in the EU with sizeable sectoral and country spillovers. For instance, tackling the regulatory restrictiveness in legal, accounting, architectural and engineering services may increase EU value added by up to €41 billion, generating jobs for 500,000 persons, after ten years.
    Keywords: region, growth, rhomolo, indirect jobs, coal, input-output analysis
    JEL: C63 C68
    Date: 2019–12
  4. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high-risk and low-risk banks. This adversely affects the balance sheets of highrisk bank borrowers, leading to lower payouts, capital expenditures and employment. Overall, our results suggest that banks' capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender-of- last-resort function.
    Keywords: Central bank liquidity,Monetary policy transmission,Corporate deposits,Financial crisis,Lender of last resort,Loans,Real effects
    JEL: E43 E58 G01 G21
    Date: 2019
  5. By: Tsakanikas, Aggelos; Roth, Felix; Caliò, Simone; Caloghirou, Yannis; Dimas, Petros
    Abstract: This paper analyzes the contribution of intangible inputs and participation in global value chains (GVCs) to the productivity performance of an EU-28 country sample over the time frame 2000-2014. Utilizing new data from the GLOBALINTO Input-Output Intangibles database, this paper finds a positive relationship between a country's intangible inputs and its productivity performance once the interaction between intangible inputs and the participation in Global Value Chains is taken into account. This effect is stronger in the subset of 19 euro area countries. The results clarify that national and European policymakers should ensure the mechanisms, the tools and the legislative framework that will support sufficient production and development of intangible inputs by investing in public intangibles, such as the quantity and quality of a highly-skilled labour force and well-functioning formal and informal institutions that could lead to the further growth of intangibles. Furthermore, the need for a unified EU intangibles policy framework arises, in which common guidelines align national agendas in order to address the relevant gaps in intangibles industrial policy.
    Keywords: Intangibles,Global Value Chain,Productivity Performance,European Union,Euro Area
    Date: 2020
  6. By: Dimitrios Anastasiou (Athens University of Economics and Business and Alpha Bank); Zacharias Bragoudakis (Bank of Greece); Stelios Giannoulakis (Athens University of Economics and Business)
    Abstract: We link senior banks loan officers’ responses regarding their decisions for bank credit standards, from successive surveys from the European Bank Lending Survey to investigate two important issues. First, we examine the relationship between bank credit standards (CS) and perceived and actual financial crisis. Second, we investigate whether the notion of the self-fulfilling prophecy is applicable in the case of the 2008 global financial crisis. In particular, the second main research question that we try to answer is whether the perceived crisis (as implied by the Google search query “financial crisis”) contributed to the acceleration of the outburst of the actual crisis. We find that both perceived and actual financial crisis affect senior bank loan officers’ credit standards, with the actual crisis having the greatest impact. These results are consistent both in the short and in the long run. Finally, by putting forward a binary choice model we find sufficient evidence to support the Self-Fulfilling Prophecy notion.
    Keywords: Credit Standards; Financial Crisis; Google Trends; Crisis Sentiment; Self-Fulfilling Prophecy.
    JEL: C51 E30 E32 E44 E51 G01 G21
    Date: 2020–01
  7. By: P. Manasse; G. Moramarco; G. Trigilia
    Abstract: This paper studies the impact of political risk on exchange rates. We focus on the Brexit Referendum as it provides a natural experiment where both exchange rate expectations and a time-varying political risk factor can be measured directly. We build a simple portfolio model which predicts that an increase in the Leave probability triggers a depreciation of the British Pound, both on account of exchange rate expectations and of political risk. We estimate the model for multilateral and bilateral British Pound exchange rates. The results confirm the model’s main implications. When we extend the analysis to a portfolio model of multiple currencies, we find that the cross-currencies restrictions implied by the theory are not rejected by our system estimation. Moreover, the joint estimates of the multi-currency model in the presence of time-varying political risk premium are in many cases consistent with the Uncovered Interest Parity.
    JEL: F31 F41 G11 G15
    Date: 2020–02
  8. By: Akvile Bertasiute; Domenico Massaro; Matthias Weber
    Abstract: We analyze different behavioral models of expectation formation in a multicountry New Keynesian currency union model. Our analyses yield the following robust results. First, economic integration is of crucial importance for the stability of the economic dynamics in a currency union. Second, when the economic dynamics are unstable, more activist monetary policy does not lead to stable economic dynamics. These findings have natural counterparts in the rational expectations version of the model: there, economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate, more activist monetary policy does not lead to a determinate equilibrium. In an application to euro area data, we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance.
    Keywords: Behavioral Macroeconomics, Monetary Unions, Determinacy of Equilibria, Reinforcement Learning
    JEL: F45 E52 D84
    Date: 2019–11
  9. By: Omar Rachedi (Banco de España)
    Abstract: This paper studies how the variation in sectoral productivities shapes the sectoral composition of the Spanish economy from 1980 to 2015. I first document an asymmetric behavior of sectoral productivities: the productivity of services declines over time, whereas the productivity of manufacturing increases until the 1990s, before slowing down. I feed the path of sectoral productivities observed in the data into a model of structural transformation with two sectors (services and manufacturing) which are connected by an Input-Output matrix. The model reproduces the variation of the gross output services share of the Spanish economy between 1980 and 2015. The model implies that – even absent changes in the trends of sectoral productivities – the annual growth rate of GDP between 2015 and 2050 shrinks by 0.6 percentage points with respect to the average growth rate between 1980 and 2015. Hence, annual GDP growth would decline from 2.3% to 1.7%. If sectoral productivities were to equal the levels observed in the Euro Area between 1980 and 2015, the average growth rate of Spanish GDP between 2015 and 2050 would be 2.1%.
    Keywords: sectoral analysis, Input-Output matrix, Spanish economy
    JEL: O11 O14 O4
    Date: 2020–01
  10. By: Kauko, Karlo; Tölö, Eero
    Abstract: Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.
    Keywords: banking crises,early warning indicators,differenced relative credit,credit intensity,countercyclical capital buffer
    JEL: G01 G17 G28
    Date: 2019
  11. By: Roberta Colavecchio; Ieva Rubene
    Abstract: How long does it take for exchange rate changes to pass through into inflation? Does it make a difference whether the exchange rate depreciates or appreciates? Do relatively large exchange rate changes entail more exchange rate pass-through? In this paper, we examine possible non-linearities in the transmission of exchange rate movements to import and consumer prices in all 19 euro area countries as well as the euro area as a whole from 1997 to 2019Q1. We extend a standard single-equation linear framework with additional interaction terms to account for possible non-linearities and apply local projections to obtain state-dependent impulse response functions. We find that (i) euro area consumer and import prices respond significantly to exchange rate movements after one year, responding more when the exchange rate change is relatively large; and (ii) euro appreciations and depreciations affect the level of euro area exchange rate pass-through in a symmetric fashion; (iii) for euro area countries results differ for import and consumer prices and across countries.
    Keywords: Exchange Rate Pass-Through; Inflation; Local Projections; Non-Linearities
    JEL: E31 F41
    Date: 2019–12
  12. By: Turchin, Peter; Korotayev, Andrey
    Abstract: This article revisits the prediction, made in 2010, that the 2010–2020 decade would likely be a period of growing instability in the United States and Western Europe (Turchin 2010). This prediction was based on a computational model that quantified in the USA such structural-demographic forces for instability as popular immiseration, intraelite competition, and state weakness prior to 2010. Using these trends as inputs, the model calculated and projected forward in time the Political Stress Index, which in the past was strongly correlated with socio-political instability. Ortmans et al. (2017) conducted a similar structural-demographic study for the United Kingdom and obtained similar results. Here we use the Cross-National Time-Series Data Archive for the US, UK, and Western European countries to assess these structural-demographic predictions. We find that such measures of socio-political instability as anti-government demonstrations and riots increased dramatically during the 2010–2020 decade in all of these countries.
    Date: 2020–01–12
  13. By: Toma Lankauskiene (Vilnius Gediminas Technical University)
    Abstract: The article aims to apply the growth accounting methodology to the Baltic countries in order to obtain detailed productivity growth determinants in the aggregated market economy with a particular focus to capital input. To this end, a new database following the KLEMS methodology for tangible and intangible capital indicators is constructed. The paper analyses determinants’ genesis and growth tendencies in the context of more developed countries and uncovers the productivity gains associated with different types of capital assets. First, an overview of the economies during the period researched is presented. Second, a methodology is developed to derive new intangibles and EU KLEMS data for the Baltic countries. Third, statistical data are constructed for all economies and the growth accounting method is applied in order to obtain comparable results. Finally, economic analysis is conducted to detect certain aspects of the growth determinants for differently developed and structured economies.
    Keywords: productivity growth; KLEMS methodology; growth accounting; tangible capital; intangible capital; national accounts
    JEL: O47 E22
    Date: 2020–01
  14. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: This contribution to the panel on the future to EMU discusses the tensions that arise from the fact that banks are, on the one hand, an essential element of the monetary transmission mechanism and, on the other hand, an integral part of local, regional or national polities. Banking union can eliminate or at least reduce some of the procrastination that has allowed maintained bank weaknesses to persist and harmed the transmission of monetary policy but, whereas the SSM has been fairly successful, resolution is still not working properly and needs further reforms. At the same time, banking union suffers from the problem that interventions from Brussels or Frankfurt are seen as infringements of national sovereignty that lack political legitimacy. The conflict between supranational and national interests is ultimately irresolvable but, if EMU is to survive, measures must be taken to limit its impact.
    Keywords: Monetary union, central banking, politics of banks, banking union, bank resolution, bail-in.
    JEL: E42 E44 E51 G18 G28 G33
    Date: 2019–11
  15. By: Andrea Berardi (Ca Foscari University of Venice - Dipartimento di Economia); Alberto Plazzi (Swiss Finance Institute; Universita' della Svizzera italiana)
    Abstract: Using a stochastic volatility affine term structure model, we explicitly consider the interrelation between yield curves and macro and volatility factors. We provide estimates of short rate expectations, term premium and convexity of nominal yields and for their real and inflation components for four different currency areas: US, Euro Area, UK, and Japan. We find that in all areas there are non-negligible convexity effects in correspondence with high volatility periods, and that term premium and convexity explain a significant proportion of the dynamics at the long end of the yield curve. Using panel regressions, we show that, overall, short rate expectations are procyclical while term premia exhibit a countercyclical behaviour and tend to increase with yield volatility. We also detect strong cross-country co-movements both in short rate expectations and term premia, with the degree of connectedness exhibiting significant time variation..
    Keywords: Term structure, Term premia, Yield volatility, Macro factors
    JEL: G12 E43 E44 C58
    Date: 2019–06
  16. By: Simone Giansante (University of Bath - School of Management); Mahmoud Fatouh (University of Essex; Bank of England); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We investigate the impact of the Bank of England’s asset purchase program (APP) on the composition of assets of UK banks, and to the implications for the real economy, using a unique database on the program. The identification of banks that receives deposits (QE banks) injections by the program as well as the magnitude of these injections provides the ideal empirical design for a difference-in-difference matching exercise. We find no evidence that suggests QE boosted bank lending to the real economy. The overall reduction of retail lending was more pronounce for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk weighted investments, such as government securities and reserves, as confirmed by the increased sensitivity of their equity returns on peripheral EU bond returns. Our findings suggest that risk weighted based capital constraints can limit the effectiveness of expansionary unconventional monetary policies and provide incentives on carry trade activities.
    Keywords: monetary policy, quantitative easing, bank lending
    JEL: E51 G21
    Date: 2019–09

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