nep-eec New Economics Papers
on European Economics
Issue of 2020‒02‒24
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. "Challenges for the EU as Germany Approaches Recession" By George K. Zestos; Rachel N. Cooke
  2. Inflation expectations in Phillips Curves models for the euro area By Dmitry Kulikov; Nicolas Reigl
  3. What are Europeans’ views on migrant integration?: An in-depth analysis of 2017 Special Eurobarometer “Integration of immigrants in the European Union” By Lenka Drazanova; Thomas Liebig; Silvia Migali; Marco Scipioni; Gilles Spielvogel
  4. Revisiting the monetary presentation of the euro area balance of payments By Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
  5. What’s on the ECB’s mind? – Monetary policy before and after the global financial crisis By Jonas Gross; Johannes Zahner
  6. How Banks Respond to Distress: Shifting Risks in Europe’s Banking Union By Mark Mink; Rodney Ramcharan; Iman van Lelyveld
  7. Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe By Hannes Boehm; Julia Schaumburg; Lena Tonzer
  8. Productivity Growth and Value Chains in Four European Countries By Izabela Karpowicz; Nujin Suphaphiphat
  9. Forecast performance in the ECB SPF: ability or chance? By Meyler, Aidan

  1. By: George K. Zestos; Rachel N. Cooke
    Abstract: This paper analyzes recent macroeconomic developments in the eurozone, particularly in Germany. Several economic indicators are sending signals of a looming German recession. Geopolitical tensions caused by trade disputes between the United States and China, plus the risk of a disorderly Brexit, began disrupting the global supply chain in manufacturing. German output contraction has been centered on manufacturing, particularly the automobile sector. Despite circumstances that call for fiscal intervention to rescue the economy, Chancellor Angela Merkel's government was overdue with corrective measures. This paper explains Germany's hesitancy to protect its economy, which has been based on a political and historical ideology that that rejects issuing new public debt to increase public spending, thus leaving the economy exposed to the doldrums. The paper also considers serious shortcomings in the European Union’s (EU) foreign and defense policies that recently surfaced during the Syrian refugee crisis. The eurocrisis revealed near-fatal weaknesses of the European Monetary Union (EMU), which is still incomplete without a common fiscal policy, a common budget, and a banking union. Unless corrected, such deficiencies will cause both the EU and the EMU to dissolve if another asymmetric shock occurs. This paper also analyzes recent geopolitical developments that are crucial to the EU/eurozone's existential crisis.
    Keywords: Balanced Budget; Fiscal Stimulus; Debt Brake; Recession; Austerity; Geopolitical Tensions; Syria; Libya
    JEL: B22 E50 E60 F02 F15 F45 H30 H60
  2. By: Dmitry Kulikov; Nicolas Reigl
    Abstract: This paper takes a fresh look at the use of the Phillips curve and various in ation expectation proxies for tracking euro area in ation dynamics in the aftermath of the global nancial crisis of 2008. Because in ation expectations can be measured in a multitude of alternative ways and the Phillips curve model itself is subject to many potential speci cation choices, we employ a novel thick modelling perspective that is data and model-agnostic and estimate a large number of di erent Phillips curve models using di erent data series for di erent components of our models. We nd that Phillips curve models without any forward-looking expectational terms are uniformly the worst predictors of euro area in ation rates after 2013, when measured for the RMSE criterion across all models and speci cations. This result underlines the importance of in ation expectations in tracking the recent dynamics of euro area in ation and shows that in ation persistence alone or in combination with di erent slack and cost push terms cannot satisfactorily explain the euro area in ation story during the period of missing in ation after 2012. We also illustrate the usefulness of the thick modelling approach for practical modelling and forecasting of the euro area in ation series.
    Keywords: data-rich models, thick modelling, data and model uncertainty, Phillips curve, in ation expectations, in ation dynamics, euro area
    JEL: E31 E37 E58 C13 C15 C52
    Date: 2020–01–29
  3. By: Lenka Drazanova (European University Institute); Thomas Liebig (OECD); Silvia Migali (Joint Research Centre - European Commission); Marco Scipioni (Joint Research Centre - European Commission); Gilles Spielvogel (OECD)
    Abstract: This paper provides an in-depth description of public opinion about immigrants’ integration in European countries, as captured in the 2017 Special Eurobarometer on this topic. It highlights a near consensus among European respondents on the meaning of integration, but more variation across countries regarding policy options to support integration. It also shows that positive opinions about immigration are often associated with a favourable public perception of integration. Looking at the individual correlates of opinions about immigration and integration, this paper finds that actual knowledge about the magnitude of immigration is positively correlated with attitudes to immigration but not integration. In contrast, more interactions with immigrants are associated with more positive views on integration but not necessarily on immigration.
    Keywords: Eurobarometer, Immigration, Integration, Public opinion
    JEL: F22 J61 J68
    Date: 2020–02–19
  4. By: Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
    Abstract: We explain how the external counterpart of the euro area M3 can be analysed by using the euro area balance of payments (b.o.p.). This is possible because the net external assets of the monetary financial institutions (MFIs) are present in two statistical frameworks that follow similar conventions: the balance sheet items (BSI) of MFIs and the balance of payments statistics. The first step to including external flows in the monetary analysis is to understand the nature of the flows between resident money holders and the rest of the world. This is possible thanks to the monetary presentation of the b.o.p, which provides information on the nature of external transactions and therefore guidance on the persistence of the monetary signal stemming from external flows.Over the past five years, the increase in the euro area’s external competitiveness has given rise to a sustained current account surplus that has consistently supported monetary inflows into the euro area. At the same time, portfolio transactions, which closely reflect financial and monetary policy conditions, have fluctuated significantly, increasing monetary inflows in the period from mid-2012 to mid-2014 and turning them into net outflows during the asset purchase programme (APP) period. JEL Classification: E51, E52, F45, F41, F43, F32, F34
    Keywords: balance of payments, balance sheet items, cross-border flows, monetary aggregates, monetary financial institutions, net external assets
    Date: 2020–02
  5. By: Jonas Gross (University of Bayreuth); Johannes Zahner (Philipps-University Marburg)
    Abstract: This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.
    Keywords: European Central Bank, Taylor Rule, Bayesian Model Averaging, Model Uncertainty
    JEL: C11 E43 D81 E52 E58
    Date: 2020
  6. By: Mark Mink (De Nederlandsche Bank); Rodney Ramcharan (Marshall School of Business, University of Southern California); Iman van Lelyveld (Vrije Universiteit Amsterdam)
    Abstract: This paper uses granular bond portfolio data to study how banking systems across the European Union (EU) adjust their asset holdings in response to regulatory solvency shocks. We also study the impact of these shocks at financial intermediaries on the prices of bonds in their portfolio. Despite the creation of a Single Supervisory Mechanism (SSM) in the EU, we find that risk-shifting interacts with regulatory arbitrage motives to explain how banks adjust their portfolios after adverse solvency shocks. After regulatory solvency declines, banks increase their exposure to domestic bonds, including higher yielding but zero risk-weight sovereign bonds. The increase in banking system risk might therefore be even larger than the decline in risk-weighted solvency ratios suggests. Distress in the banking system also feeds back onto bond prices. Bonds owned by less-well capitalized banking systems trade at a discount relative to otherwise similar bonds owned by better capitalized intermediaries.
    Keywords: Bank capital, portfolio allocation, risk shifting, SSM
    JEL: G11 G12 G15 G21
    Date: 2020–02–04
  7. By: Hannes Boehm (Halle Institute for Economic Research); Julia Schaumburg (Vrije Universiteit Amsterdam); Lena Tonzer (Halle Institute for Economic Research)
    Abstract: We analyze 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 synchronization. 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 Synchronization, Industry Dynamics, Spatial Model
    JEL: E32 F44 G10
    Date: 2020–02–04
  8. By: Izabela Karpowicz; Nujin Suphaphiphat
    Abstract: Advanced economies have been witnessing a pronounced slowdown of productivity growth since the global financial crisis that is accompanied in recent years by a withdrawal from trade integration processes. We study the determinants of productivity slowdown over the past two decades in four closely integrated European countries, Austria, Denmark, Germany and the Netherlands, based on firm-level data. Participation in global value chains appears to have affected productivity positively, including through its effect on TFP when facilitated by higher investment in intangible assets, a proxy for firm innovation. Other contributors to productivity growth in firms are workforce aging, access to finance, and skills mismatches.
    Date: 2020–01–31
  9. By: Meyler, Aidan
    Abstract: In this paper, we consider whether differences in the forecast performance of ECB SPF respondents reflect ability or chance. Although differences in performance metrics sometimes appear substantial, it is challenging to determine whether they reflect ex ante skill or other factors impacting ex post sampling variation such as the nature of economic shocks that materialised or simply which rounds participants responded in. We apply and adapt an approach developed by D’Agostino et al. (2012) who used US SPF data. They developed a test of a null hypothesis that all forecasters have equal ability. Their statistic reflects both the absolute and relative performance of each forecaster and they used bootstrap techniques to compare the empirical results with the equivalents obtained under the null hypothesis of equal forecaster ability. Our results, at a first pass, suggest that there would appear to be evidence of good/bad forecasters. However once we control for the autocorrelation that is caused by the overlapping rolling horizons, we find, like D’Agostino et al. (2012), that the best forecasters are not statistically significantly better than others. Unlike D’Agostino et al. (2012), however, we do not find evidence of forecasters that perform very significantly worse than others. Controlling for autocorrelation is a key feature of this paper relative to previous work. Our results hold considering the whole sample period of the ECB SPF (1999-2018) as well as the pre- and post-global financial crisis samples. We also find that when assessed across all variables and horizons, the aggregate (consensus) SPF forecast performs best. JEL Classification: C53, E27, E37
    Keywords: bootstrap, forecasting, performance
    Date: 2020–02

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