nep-eec New Economics Papers
on European Economics
Issue of 2020‒03‒02
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Reform Preferences of Central and Eastern European Economic Experts By Sebastian Blesse; Annika Havlik; Friedrich Heinemann
  2. Energy costs and competitiveness in Europe By Ivan Faiella; Alessandro Mistretta
  3. The Euro Area Periphery Sovereigns' Fiscal Positions and Unconventional Monetary Policy By Oliver Hülsewig; Johann Scharler
  4. Sovereign Debt Crisis in Portugal and Spain By António Afonso; Nuno Verdial
  5. Fiscal Consolidation and Automatic Stabilization: New Results By Mathias Dolls; Clemens Fuest; Andreas Peichl; Christian Wittneben
  6. The importance of value chains for euro area trade: a time series perspective By Duncan van Limbergen; Robert Vermeulen
  7. Currency Compositions of International Reserves and the Euro Crisis By Laser, Falk Hendrik; Weidner, Jan
  8. Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area By Philippe Andrade; Filippo Ferroni
  9. Rising Protectionism and Global Value Chains: Quantifying the General Equilibrium Effects By Rita Cappariello; Sebastián Franco-Bedoya; Vanessa Gunnella; Gianmarco Ottaviano
  10. Disaggregate income and wealth effects in the largest euro area countries By de Bondt, Gabe; Gieseck, Arne; Herrero, Pablo; Zekaite, Zivile
  11. Macroprudential policy measures: macroeconomic impact and interaction with monetary policy By Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
  12. Ring-fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals By Daniel Klein; Christopher A. Ludwig; Christoph Spengel
  13. Quantifying Risks to Sovereign Market Access: Methods and Challenges By Diana Zigraiova; Aitor Erce; Xu Jiang
  14. How banks respond to distress: Shifting risks in Europe's banking union By Mark Mink; Rodney Ramcharan; Iman van Lelyveld
  15. Corporates' dependence on banks: The impact of ECB corporate sector purchases By Joost Bats
  16. The (Subjective) Well-Being Cost of Fiscal Policy Shocks By Kodjovi M. Eklou; Mamour Fall
  17. Are Eurozone Household Income Distributions Converging? Introducing MGT and DisGini, New Tools for Multilateral Distributional Comparisons. By Gordon Anderson; Oliver Linton; Grazia Pittau; Yoon Jae Whang; Roberto Zelli

  1. By: Sebastian Blesse; Annika Havlik; Friedrich Heinemann
    Abstract: This study explores the positions of economic experts from Central and Eastern European (CEE) Member States in the euro reform debate. Given the dominant voices from French and German politicians and acacemics in the European discourse, there is an obvious neglect for the positions of CEE countries. Our study tries to fill this gap with a large survey among economic expert communities in all CEE countries conducted in spring 2019. We compare euro reform preferences to benchmarks of surveyed experts in France, Germany, and Italy. We discuss implications for the ongoing euro area reform with a particular focus on several non-euro members’ growing reluctance to introduce the common currency. We argue that only a balanced reform package that combines solidarity with debt self-responsibility could foster the euro’s appeal in the CEE region.
    Date: 2019
  2. By: Ivan Faiella (Bank of Italy); Alessandro Mistretta (Bank of Italy)
    Abstract: The worldwide upswing in energy prices recorded in the last decade has placed decarbonization strategies, and their potentially negative consequences for firms’ costs and competitiveness, at the centre of the European policy debate. We evaluate the relevance of energy policies for competitiveness by augmenting the standard analysis, largely based on labour costs, with a Unit Energy Cost (UEC) indicator. We analyse how the UEC evolved in different countries and industries and we assess its main drivers (prices, energy intensity, sector composition). Modelling the relationship between foreign sales and the UEC in a gravity model setup, we find that an increase in UECs reduces bilateral exports; the largest negative effects are obtained when limiting the analysis to euro-area countries. Our results strengthen the case for pursuing further integration of European energy markets (as provided for in the Energy Union and Winter packages) to ensure that the ambitious long-term European decarbonization targets do not have a negative impact on the euro-area industry’s ability to compete worldwide.
    Keywords: firms’ costs, energy, competitiveness, decarbonization, EMU
    JEL: C53 D24 Q41
    Date: 2020–02
  3. By: Oliver Hülsewig; Johann Scharler
    Abstract: We explore the reaction of the euro area periphery sovereigns’ fiscal positions to an unconventional monetary policy shock. We estimate panel vector autoregressive (VAR) models over the period 2010-2018, and identify the shock by imposing sign restrictions. Our results suggest that the sovereigns’ fiscal positions improve in response to the economic expansion induced by an expansionary non-standard monetary policy innovation which lowers sovereign CDS spreads. Moreover, we observe that fiscal discipline is maintained rather than undermined.
    Keywords: euro area periphery sovereigns, fiscal position, unconventional monetary policy, panel vector autoregressive model
    JEL: E52 E62 H62 H63
    Date: 2020
  4. By: António Afonso; Nuno Verdial
    Abstract: The 2007-2008 financial crisis and the European sovereign debt crisis effects rippled through the financial system, banks and sovereign states. We analyze these events, focusing on the Portuguese and Spanish case after providing an insight into the Eurozone. We assessed the pricing of sovereign risk by performing an OLS/2SLS fixed effects panel analysis on a pool of Eurozone countries and a SUR regression with Portugal and Spain covering the period 1999:11 until 2019:6. Our results show that the pricing of sovereign risk changed with the crisis and the “whatever it takes” speech of Mario Draghi. Specifically, market pricing of the Eurozone credit risk, liquidity risk and the risk appetite increased after the crisis and it relaxed afterwards. We did not find evidence of specific pricing regime changes after the speech in the Portuguese and Spanish case.
    Date: 2020
  5. By: Mathias Dolls; Clemens Fuest; Andreas Peichl; Christian Wittneben
    Abstract: We analyze how the combined effect of automatic stabilizers and discretionary changes in tax-benefit systems have affected the cushioning of income shocks in the Euro zone and the EU-27 in the period 2007–2014. We propose a new summary measure of the combined effect of automatic stabilizers and discretionary policy changes based on micro data and counter-factual simulation. Discretionary fiscal policy supported the effects of automatic stabilizers in the years 2008 and 2009 but then became much more restrictive. For the Euro zone as a whole, the share of income shocks absorbed by the tax and transfer system declined from 48 percent in 2008 to 24 percent in 2011. For some of the countries most affected by the crisis, the stabilization effect was even negative in some years of the crisis, implying that the tax and transfer system amplified income shocks. We also compare our measure of stabilization to estimates based on macro data.
    Keywords: automatic stabilizers, fiscal consolidation, fiscal policy
    JEL: E63 E62 H31
    Date: 2019
  6. By: Duncan van Limbergen; Robert Vermeulen
    Abstract: This paper analyses intra- and extra-euro area (EA) trade flows for the five largest EA countries in order to gauge the importance of value chains. We bridge findings from input-output table analysis with a time series approach. Evidence of value chains is found for all trade patterns and is most pronounced within the EA. Imports from EA and RoW are not only domestically absorbed, but also re-exported. Exports to EA depend on demand in both the importing country and the rest of the world (RoW), indicating the importance of re-exports to RoW. Demand factors play a large role in all trade patterns.
    Keywords: global value chains; euro area; trade patterns
    JEL: F14 F45
    Date: 2020–02
  7. By: Laser, Falk Hendrik; Weidner, Jan
    Abstract: During recent years, central banks have increased the levels of their international reserves at an unprecedented pace. In this paper, we introduce new country-specific reserve data and examine determinants of the composition of inter- national reserves. Using a dataset of 36 countries (and the euro area) for the years from 1996 to 2016, we identify currency pegs and trade patterns as determinants of currency compositions. Our results emphasize the importance of transaction moti- ves for the composition of currency reserves. The euro crisis appears to have been a setback for the euro, which temporarily seemed to challenge the US dollar as the most important international reserve currency and potentially impacted the deter- mination of international reserve compositions.
    Date: 2020–02
  8. By: Philippe Andrade; Filippo Ferroni (University of Surrey; Banque de France; Federal Reserve Bank of Chicago)
    Abstract: What drives the strong reaction of financial markets to central bank communication on the days of policy decisions? We highlight the role of two factors that we identify from high-frequency monetary surprises: news on future macroeconomic conditions (Delphic shocks) and news on future monetary policy shocks (Odyssean shocks). These two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations. A drop in future interest rates that is associated with a negative Delphic (Odyssean) shock is perceived as being contractionary (expansionary). These offsetting effects can explain why central bank communication leads to a strong reaction of the yield curve together with a weak reaction by inflation expectations or stock prices. The two shocks also have different impacts on macroeconomic outcomes, such that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve. However, changes in their communication policy can influence the way markets predominantly understand communication about future interest rates.
    Keywords: central bank communication; yield curve; monetary policy surprises; signaling; forward guidance
    JEL: C10 E32 E52
    Date: 2019–07–01
  9. By: Rita Cappariello (Bank of Italy); Sebastián Franco-Bedoya (The World Bank); Vanessa Gunnella (European Central Bank); Gianmarco Ottaviano (Bocconi University)
    Abstract: Quantifying the effects of trade policy in the age of ’global value chains’ (GVCs) requires an enhanced analytical framework that takes due account of the observed international input-output relations. However, the existing quantitative general equilibrium models generally assume that industry-level bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This means applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in the available input-output data sets. To overcome this limitation in the existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in the input-output tables. This allows us to investigate the relationship between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies.
    Keywords: Trade model, supply chains, Trade policy shocks, Brexit
    JEL: F13 F15 F40 F60
    Date: 2020–02
  10. By: de Bondt, Gabe (European Central Bank); Gieseck, Arne (European Central Bank); Herrero, Pablo (European University Institute); Zekaite, Zivile (Central Bank of Ireland)
    Abstract: This study extends a thick modelling tool for aggregated euro area real private consumption of de Bondt et al. (2019) to the four largest euro area countries. The suite of error correction models performs well in and out of sample. The ranges and averages of estimated elasticities are, however, sensitive to the exact model specication. We also show that decomposing disposable income into labour, property and transfer income is essential for understanding and forecasting consumption. Finally, substantial cross-country heterogeneity in marginal propensities to consume out of income and wealth components calls for caution when interpreting aggregate euro area developments.
    Keywords: private consumption, income, wealth, thick modelling
    JEL: C53 D12 E21 E27
    Date: 2019–12
  11. By: Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
    Abstract: This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times. JEL Classification: E4, E43, E5, E52, G20, G21
    Keywords: bank stability, credit, monetary policy
    Date: 2020–02
  12. By: Daniel Klein; Christopher A. Ludwig; Christoph Spengel
    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 ring-fencing digital tax measures impact firm values.
    Date: 2019
  13. By: Diana Zigraiova (European Stability Mechanism); Aitor Erce (Board of Governors of the Federal Reserve System (U.S.)); Xu Jiang (European Stability Mechanism)
    Abstract: In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top-performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.
    Keywords: sovereign market access; Euro area sovereign bond market; variable selection; sovereign debt crises; forecasting
    JEL: G01 C53 G15
    Date: 2020–02–10
  14. By: Mark Mink; Rodney Ramcharan; Iman van Lelyveld
    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: 2020–01
  15. By: Joost Bats
    Abstract: This paper investigates whether ECB corporate sector purchases impact the funding structure of non-financial corporates. Regression models are estimated using a unique microdata panel, combining data on all Eurosystem corporate sector purchases and individual balance sheets of 672 non-financial corporations headquartered in the euro area with access to capital markets. The findings indicate that ECB purchases of corporate bonds reduce the dependence on bank financing of corporates whose debt is purchased. The effects vary according to corporates' interest paid, financial expenses and price-to-book ratio. In addition, this paper shows that the relationship between central bank purchases and corporates' dependence on bank financing is non-linear. The downward effect on bank dependence is largest for those corporates of which most debt is purchased under the CSPP, relative to their total stock of debt.
    Keywords: Non-financial corporates; bank dependence; ECB corporate sector purchases; monetary policy
    JEL: E44 E58 G10 G21
    Date: 2020–01
  16. By: Kodjovi M. Eklou; Mamour Fall
    Abstract: Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.
    Keywords: Fiscal consolidation;Tax increases;Fiscal policy;Gross capital formation;Economic conditions;Fiscal Consolidations,Subjective Well-Being,Spending cuts,Tax hikes,WP,life satisfaction,spend cut,tax hike,well-being
    Date: 2020–01–17
  17. By: Gordon Anderson; Oliver Linton; Grazia Pittau; Yoon Jae Whang; Roberto Zelli
    Abstract: The recent rise of economic nationalism together with the economic demise or potential departure of some of its constituent nations, has raised concerns regarding the coherence of the European Union. Formed to promote commonality of wellbeing among its constituents, there is interest in seeing whether its nation income distributions are converging. The usual practice of comparing per capita incomes has met with some criticism in the treatment e ects and convergence literatures (Carniero et. al. 2003, Durlauf and Quah 2002) since such moment comparisons can mask important distributional differences relevant for analysis. Here, in response to these concerns, some indices and tests for quantifying the commonality or di erentness in collections of distributions are proposed and implemented in the context of a sigma convergence study of 21st century Eurozone household income distributions. The results indicate that, when the Eurozone is considered as an entity with no nation boundaries, in a latent four class mixture distribution model, both weighted and unweighted versions of the statistics record convergence as the theory predicts for such a confederation. However when constituent nations are considered as separate entities within a confederation, unweighted versions of the tests record convergence, whereas weighted versions reveal divergence with increasing segmentation among the more populous nations in the Eurozone outweighing the convergent patterns exhibited by the smaller populated countries recently admitted to the Eurozone.
    Keywords: Distributional Differences, Inequality Indices,Multilateral Comparisons
    JEL: O47 I31
    Date: 2020–02–20

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