nep-eec New Economics Papers
on European Economics
Issue of 2020‒03‒09
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Demand shocks for public debt in the Eurozone By Andras Lengyel; Massimo Giuliodori
  2. Economic integration and the distribution of income in Europe: A between country analysis By Atanu Ghoshray; Mercedes Monfort; Javier Ordóñez
  3. On the term structure of liquidity in the European sovereign bond market By Conall O'Sullivan; Vassilios G. Papavassiliou
  4. Trust in the central bank and inflation expectation By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
  5. R-star in Transition Economies: Evidence from Slovakia By Patrik Kupkovic
  6. Social exclusion and convergence in the EU: An assessment of the Europe 2020 strategy By Juan Ángel Lafuente; Amparo Marco; Mercedes Monfort; Javier Ordóñez
  7. Debt rule design in theory and practice: the SGP’s debt benchmark revisited By Hauptmeier, Sebastian; Kamps, Christophe
  8. House price convergence Across Europe By Laia Maynou; Bruce Morley; Mercedes Monfort; Javier Ordóñez
  9. Distributional Implications of Labor Market Reforms: Learning from Spain's Experience By Ara Stepanyan; Jorge Salas
  10. Exchange rates and consumer prices: evidence from Brexit By Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
  11. Negative interest rate, bank profitability and risk-taking By Whelsy Boungou
  12. Limitation of holding structures for intra-EU dividends: A blow to tax avoidance? By Maarten van 't Riet; Arjan Lejour
  13. Stochastic convergence in real personal disposable income in the EU By Juan Carlos Cuestas; Mercedes Monfort; Javier Ordóñez
  14. Is government consumption really crowding out investment? Evidence from the EU28 By Juan Carlos Cuestas; Mercedes Monfort; Javier Ordóñez

  1. By: Andras Lengyel; Massimo Giuliodori
    Abstract: In this paper we use high-frequency (intraday) government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large and persistent negative movements in Treasury yields. There is also evidence of significant spillover effects into Treasury bond, equity and corporate bond markets of other euro area countries. We find interesting differences in the effects of demands shocks between the two countries, which are consistent with the "safe-haven" status of German bonds versus the "high-debt" status of Italian Treasuries. Results also suggest that these effects are stronger during periods of high financial stress.
    Keywords: Sovereign bonds; Primary market; High-frequency identification; Yield curve
    JEL: F4 E43 G15
    Date: 2020–03
  2. By: Atanu Ghoshray (Department of Economics, Newcastle University Business School, UK); Mercedes Monfort (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Javier Ordóñez (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: In this paper we analyse income inequality across EU countries. Monitoring the between-country inequality trend at the EU level provides information about income convergence of EU countries with important implications at highly topical issues such as social cohesion and cross-country migration. In addition to the analysis of the between-country inequality, given that monetary and market integration may affect inequality differently across country-groups, we decompose between-country inequality in its two basic components, that is, inequality between-group and within-group of countries. Groups correspond to non-euro zone, core euro-zone and non- core euro-zone countries. This analysis will allow us to investigate how the observed trend in between-country inequality is related to developments in the between or the within-group component. Three conclusions emerge. First, between-country inequality experienced a trend break at the beginning of the 70s, demarcating of declining inequality to a period where inequality shows no decline up to the introduction of the euro, when betweencountry inequality increased and, consequently, income diverged among European countries. Second, the introduction of the euro was coupled with important recompositional effects of between-country inequality in Europe: from 1999 onwards between-group inequality shapes the developments of between-country inequality, thus, that the observed divergence in income from the beginning of the 2000s is explained by the income divergence between core an non-core countries.Third, shocks to between-country inequality tend to be persistent implying that specific policy measures at the EU level need to be implemented to cope with the undesirable effects of rising inequality.
    Keywords: European Union, structural breaks, economic integration, inequality, unit roots
    JEL: C22 C32 N30
    Date: 2020
  3. By: Conall O'Sullivan; Vassilios G. Papavassiliou
    Abstract: The paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, one of Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.
    Keywords: Microstructure; Liquidity; Eurozone debt crisis; Sovereign bond markets; Common factors; Liquidity premium
    JEL: C5 G01 G10 G15
    Date: 2020–05
  4. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals’ expectations and uncertainty about future inflation, and whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB’s inflation target. These findings hold after controlling for people’s knowledge about the objectives of the ECB. JEL Classification: D12, D81, E03, E40, E58
    Keywords: anchoring, consumer expectations, inflation uncertainty, trust in the ECB
    Date: 2020–02
  5. By: Patrik Kupkovic (Narodna banka Slovenska, Bratislava, Slovakia)
    Abstract: The aim of this paper is to estimate the equilibrium real interest rate in Slovakia by means of a semi-structural unobserved components model. The equilibrium real interest rate is understood here as a short-term, risk-free real interest rate consistent with output at its potential level, and inflation at its target level after the effect of all cyclical shocks have disappeared. Contribution to the literature is in two ways: i) development of a modelling framework for small, open, and converging economies which can be used for other transition economies, and (ii) assessment of the adoption of the euro and its effect on the equilibrium real interest rate. Based on the estimates, the equilibrium real interest rate fell from the positive pre-euro (also pre-crisis) level into to the negative territory.
    Keywords: equilibrium real interest rate, unobserved components model, open economy, monetary policy
    JEL: E43 E52 E58
    Date: 2020–02
  6. By: Juan Ángel Lafuente (IEI and Department of Finance and Accounting, Universitat Jaume I, Castellón, Spain); Amparo Marco (IEI and Department of Finance and Accounting, Universitat Jaume I, Castellón, Spain); Mercedes Monfort (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Javier Ordóñez (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: Economic convergence has long been a declared objective of the EU and considered the fundamental mechanism for achieving socioeconomic cohesion. The recent economic crisis had an uneven impact across EU countries and brought a halt to the process of economic and social convergence. In response to this situation, the Europe 2020 strategy, launched in 2010, aimed to deliver social and territorial cohesion in the Member States. In this paper we evaluate the poverty and social exclusion pillar of the Europe 2020 strategy by analysing whether it has promoted convergence across the EU countries in the indicators devised to capture risk of poverty, severe material deprivation, and the number of persons living in households with very low work intensity. Our results for all three rates indicate that convergence occurs in heterogeneous clubs that do not follow a geographic east-west or south- north pattern. Convergence within each club, especially for the severe deprivation rate, takes place by means of a catching-up process, with eastern European levels converging on the western levels. Finally, not only is there club convergence, but there is no tendency for the clubs to convergence. Poverty and social cohesion indicators show a multi-speed Europe, casting doubt on the sustainability of the overall convergence process in the EU.
    Keywords: EU integration, social cohesion, sustainability, convergence, Europe 2020
    JEL: C22 F15
    Date: 2020
  7. By: Hauptmeier, Sebastian; Kamps, Christophe
    Abstract: This paper is linked to two debates on fiscal policies: first, the implications of low interest-growth differentials for debt sustainability and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The Stability and Growth Pact's debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in the low-growth low-inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of inflation from the central bank's objective; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter's complexity without the need to revise the EU Treaties. JEL Classification: E62, F42, H61, H62, H63, H87
    Keywords: fiscal governance, fiscal policy, fiscal rules, interest rates, public debt sustainability
    Date: 2020–03
  8. By: Laia Maynou (Department of Health Policy, London School of Economics and Political Science, UK); Bruce Morley (Department of Economics, University of Bath, UK); Mercedes Monfort (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Javier Ordóñez (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: The aim of this study is to determine whether there is any evidence of convergence in house prices across the European economies, including both members and non-members of the Eurozone. A new test which searches for convergence among clusters of markets is used. This suggests there are five clusters across Europe, however there is no evidence of a Eurozone cluster. The bconvergence dynamic model shows overall convergence among the 12 countries analysed. The econometric analysis also allows us to determine the main drivers of the real House Price indices, which are private consolidated debt (%GDP), the unemployment rate (%) and the long-term government interest rate (%). Given the importance of housing markets to the economy, the Eurozone may have to consider measures that facilitate convergence across the member’s housing markets.
    Keywords: convergence, European Union, house prices
    JEL: C33 E44 R21
    Date: 2020
  9. By: Ara Stepanyan; Jorge Salas
    Abstract: Spain’s structural reforms, implemented around 2012, have arguably contributed to a faster and stronger economic recovery. In particular, there is strong evidence that the 2012 labor market reforms increased wage flexibility, which helped the Spanish economy to regain competitiveness and create jobs. But the impact of these labor reforms on income inequality and social inclusion has not been analyzed much. This paper aims to shed light on this issue by employing an econometric decomposition procedure combined with the synthetic control method. The results indicate that the 2012 labor reforms have helped improve employment and income equality outcomes with no substantial impact on the overall risk of poverty. Nevertheless, the reforms appear to have induced a deterioration of average hours worked, in-work poverty, and possibly also of involuntary part-time employment.
    Date: 2020–02–13
  10. By: Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
    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.
    Keywords: Brexit; exchange rate pass-through; import costs; inflation
    JEL: E31 F15 F31
    Date: 2019–12
  11. By: Whelsy Boungou (Larefi, University of Bordeaux)
    Keywords: Negative interest rates, bank profitability, Bank risk taking, European Union countries,dynamic panel data model
    JEL: E43 E52 E58 G21
    Date: 2019–07
  12. By: Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis); Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This article analyses the recent rulings from the European Court of Justice in two Danish cases and examines their possible impact on international tax avoidance. These rulings regard limitations of tax benefits related to cross-border dividends and interest payments resulting from the interposition of holding companies in the EU. We conclude that from a legal perspective, the rulings demonstrate the alignment of international tax policies to combat tax avoidance between the EU and the OECD.
    JEL: H25 H26 H32 F23
    Date: 2019–12
  13. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain); Mercedes Monfort (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Javier Ordóñez (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: Economic convergence has long been a declared objective of the EU and has been considered the fundamental mechanism for achieving socio-economic cohesion. Even so, the empirical literature finds a lack of real convergence as geographical clusters have emerged. In this paper we contribute to the literature on income convergence in the EU by analysing convergence in real disposable income across European countries. In contrast to the previous results on real convergence in the EU, we find that most of the countries are converging to the same equilibrium level.
    Keywords: Convergence, Europe, disposable income, cluster
    JEL: C23 F15
    Date: 2020
  14. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain); Mercedes Monfort (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Javier Ordóñez (IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: In this paper we contribute to the literature on the crowding out effect that government consumption has had on investment in the EU28 over the past 25 years. Our results show that after the crisis, government consumption shocks have affected output, while this did not happen before the crisis. For the CEECs, the effect of positive government consumption shocks has been negative for investment, while in the EU15+2 there has been no crowding out effect and output has reacted significantly and positively to government consumption shocks.
    Keywords: fiscal policy; crowding out; crisis; SVAR
    JEL: C22 F15
    Date: 2020

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