nep-eec New Economics Papers
on European Economics
Issue of 2020‒02‒17
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Why 60 and 3 percent? European debt and deficit rules - critique and alternatives By Jan Priewe
  2. Monetary Policy Uncertainty Spillovers in Time- and Frequency-Domains By Rangan Gupta; Chi Keung Marco Lau; Jacobus A Nel; Xin Sheng
  3. Eurozone periphery post-crisis By Ana Podvršič; Joachim Becker
  4. Nowcasting Real GDP Growth: Comparison between Old and New EU Countries By Evzen Kocenda; Karen Poghosyan
  5. How Safe are European Safe Bonds? An Analysis from the Perspective of Modern Portfolio Credit Risk Models By R\"udiger Frey; Kevin Kurt; Camilla Damian
  6. Factor shares and the rise in corporate net lending By Jan Behringer
  7. Fiscal Consolidation and the Current Account: OECD Evidence By Christian Breuer; Chang Woon Nam
  8. The Global Impact of Brexit Uncertainty By Tarek Hassan; Laurence van Lent; Stephan Hollander; Ahmed Tahoun
  9. Financial linkages and sectoral business cycle synchronisation: Evidence from Europe By Böhm, Hannes; Schaumburg, Julia; Tonzer, Lena
  10. The Transmission of Monetary Policy under the Microscope By Martin Holm; Pascal Paul; Andreas Tischbirek

  1. By: Jan Priewe
    Abstract: The 60 percent debt cap and the 3 percent deficit cap, enshrined in the EU Treaties since 1992, are cornerstones of the complex fiscal policy framework of the Euro area. Both numbers came into the Maastricht Treaty more or less by coincidence. There is no sound economic justification for the caps, in particular for the 60 percent debt cap if combined with the 3 percent deficit limit. The taboo of not questioning them in debates about reforming the EU fiscal framework prevents innovative thinking. We analyse attempts to explain or justify both caps by the EU Commission and compare them with other propositions from the IMF and in academia. The rules entail a bias for contractionary policy, thus dampening growth and employment, especially since the Fiscal Compact (2011). This becomes best visible if the debt and deficit dynamics in the EMU are compared with the U.S. The paper pleads for a thorough reconsideration of the EU fiscal policy rulebook in face of a fundamental change in the relationship of interest and growth rates, a key determinant of public debt. The deficit rule should allow for a more effective counter-cyclicality and for more fiscal space for public investment. Furthermore, high-debt countries in EMU should have the option to carry their legacy debt over a longer period to avoid growth-dampening austerity.
    Keywords: Fiscal policy, public debt, Stability and Growth Pact, Fiscal Compact, austerity Schuldenbremse, Stabilitäts- und Wachstumspakt, Fiskalpakt, Defizitregeln, Austerität, Staatsverschuldung
    Date: 2020
  2. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, United Kingdom); Jacobus A Nel (University of Pretoria, 0002, South Africa); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom)
    Abstract: We use the recently created monthly Interest Rate Uncertainty measure, to investigate monetary policy uncertainty across the US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden in both the time and frequency domains. We find that the largest spillover indices are from innovations in the country itself, however, there are some instances where spillover indices between countries are large. These relationships change over time and we observe large variances in pairwise spillovers during the global financial crisis. We find that most of the volatility is confined to the crisis period.
    Keywords: Connectedness, Frequency domain spillover, Monetary policy uncertainty, Pairwise spillovers, Uncertainty spillover
    JEL: C32 D80 E52 F42
    Date: 2020–01
  3. By: Ana Podvršič (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, CSEES - Centre for Southeast European Studies, Karl Franzens University Graz); Joachim Becker (Vienna University of Economics and Business - WU - Wirtschaftsuniversität Wien [Austria])
    Abstract: The article provides a comparative study of Slovenia and Slovakia to analyse the transformation of dependent accumulation regimes in the Eurozone periphery after 2010. The study of these two economies from CEE is particularly insightful to understand how the Eurozone countries from the industrial periphery coped with the challenges of restructuring after the outbreak of the crisis. The article combines dependency and régulationist approaches to study European asymmetrical accumulation regimes. We argue that the post-crisis economic trajectories in CEE continue to reflect main traits of the pre-crisis asymmetrical relationship with the core. The key vulnerabilities are linked to the ongoing reliance on FDI for export industrialisation, the narrow export specialisation, and, particularly in Slovakia, a rapid expansion of household debt. In Slovenia, under the EU supervision, the pre-crisis private debts were shifted to the public sector and henceforth burden public investment. Our findings suggest that financialisation as well the Eurozone monetary constraints should be systemically included in the analysis of post-crisis CEE growth trajectories. In addition, despite economic recovery, the accumulation regimes at Eurozone industrialised periphery continue to exhibit strong anti-labour bias.
    Keywords: financialisation,Slovakia,Eurozone crisis,uneven development,Slovenia
    Date: 2019–11
  4. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic. Address: IES, Opletalova 26, 110 00 Prague.; Institute of Theory of Information and Automation, Czech Academy of Sciences, Prague; CESifo Munich; IOS Regensburg.); Karen Poghosyan (Central Bank of Armenia, Economic Research Department, V. Sargsyan 6, 0010, Yerevan, Armenia)
    Abstract: We analyze the performance of a broad range of nowcasting and short-term forecasting models for a representative set of twelve old and six new member countries of the European Union (EU) that are characterized by substantial differences in aggregate output variability. In our analysis, we generate ex-post out-of-sample nowcasts and forecasts based on hard and soft indicators that come from a comparable set of identical data. We show that nowcasting works well for the new EU countries because, although that variability in their GDP growth data is larger than that of the old EU economies, the economic significance of nowcasting is on average somewhat larger.
    Keywords: Bayesian VAR, dynamic and static principal components, European OECD countries, factor augmented VAR, nowcasting, real GDP growth, short-term forecasting
    JEL: C33 C38 C52 C53 E37 E52
    Date: 2020–02
  5. By: R\"udiger Frey; Kevin Kurt; Camilla Damian
    Abstract: Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by (Brunnermeier et al. 2017). This paper provides a comprehensive quantitative analysis of such products. A key component of our contribution is a novel dynamic credit risk model which captures salient features of euro area sovereign CDS spreads and enables tractable modelling of default dependence amongst euro members. After successful calibration of our model to CDS spreads, we perform a thorough analysis of ESBies. We provide model-independent price bounds; we consider the expected loss as a function of model parameters and attachment points; we study the volatility of the credit spread of ESBies; and we discuss several approaches to assess the market risk of ESBies. Our analysis provides a fairly comprehensive picture of the risks associated with ESBies.
    Date: 2020–01
  6. By: Jan Behringer
    Abstract: The corporate sector has turned from a net borrowing position to a net lending position in many advanced countries over the past decades. This phenomenon is rather unusual as the corporate sector had historically borrowed funds from other sectors in the economy. In this paper, we analyze how changes in the distribution of income between wages and profits have affected corporate net lending in a sample of 40 countries for the period 1990-2016. A consistent finding is that an increase (decrease) in the corporate profit share leads to an increase (decrease) in corporate net lending, controlling for other corporate net lending determinants. We disentangle the effects of the profit share on corporate saving and investment and explore a number of alternative explanations of our results, including changes in the cost of capital, shifts in the composition of industrial sectors, the growing importance of intangible capital, and a temporary crisis phenomenon. We conclude that factor shares are an important driver of macroeconomic trends and that the rise in corporate profits has contributed considerably to the improvement in the corporate net lending positions across countries.
    Keywords: Corporate saving, investment, income distribution, cost of capital
    JEL: E21 E22 E25 G30
    Date: 2020
  7. By: Christian Breuer (Chemnitz University of Technology, Department of Economics, Junior Professorship for European Economics and ZBW - Leibniz Information Centre for Economics); Chang Woon Nam (ifo Institute Munich, CESifo and University of Applied Management Ismaning)
    Abstract: We apply a "new" conventional (CAPB-based) measure of fiscal policy, which is less prone to endogeneity issues, and find that a 1-percent of GDP fiscal consolidation leads to the improvement of the current account-to-GDP ratio by approximately 0.8 percent of GDP, while previous research based on conventional measures found a relationship of only 0.1-0.3 percentage points. We suggest that revious results based on conventional measures are biased towards underestimating the twin-deficit linkage because of endogeneity issues and the failure to adjust the CAPB for cyclical effects. After adjustment, the twin-deficit ffect is particularly pronounced in the case of expenditure cuts and in Eurozone countries. These findings are in line with previous evidence based on narrative measures.
    Keywords: fiscal adjustment; current account; twin deficit; Eurozone Countries
    JEL: E62 E63 H50
    Date: 2020–01
  8. By: Tarek Hassan (Boston University); Laurence van Lent (Frankfurt School of Finance and Management); Stephan Hollander (Tilburg University); Ahmed Tahoun (London Business School)
    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.
    Keywords: Brexit, uncertainty, sentiment, machine learning, cross-country effects
    JEL: D8 E22 E24 E32 E6 F0 G18 G32 G38 H32
  9. By: Böhm, Hannes; Schaumburg, Julia; Tonzer, Lena
    Abstract: We analyse whether financial integration between countries leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996-2017, we find that the spillover effects are positive on average but much larger during periods of financial stress, pointing towards stronger business cycle synchronisation. Dismantling GDP growth into value added growth of ten major industries, we observe that some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).
    Keywords: financial integration,business cycle synchronisation,industry dynamics,spatial model
    JEL: E32 F44 G10
    Date: 2020
  10. By: Martin Holm (University of Oslo); Pascal Paul; Andreas Tischbirek (HEC Lausanne, University of Lausanne)
    Abstract: We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the results support the importance of financial frictions, cash-flow channels, and heterogeneous effects of monetary policy.
    Keywords: Monetary policy; Household balance sheets; Liquidity constraints; Heterogeneous agent New Keynesian models
    JEL: D31 E12 E21 E24 E32 E43 E52
    Date: 2020–01–31

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