nep-eec New Economics Papers
on European Economics
Issue of 2020‒03‒16
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Populism, Political Risk and the Economy: Lessons from Italy By Balduzzi, Pierluigi; Brancati, Emanuele; Brianti, Marco; Schiantarelli, Fabio
  2. External adjustment with a common currency: The case of the Euro Area By Alberto Fuertes Mendoza
  3. Voting with their money: Brexit and outward investment by UK firms By Sampson, Thomas; Breinlich, Holger; Leromain, Elsa; Novy, Dennis
  4. Currency compositions of international reserves and the euro crisis By Laser, Falk Hendrik; Weidner, Jan
  5. Technical Appendix: “International Business Cycle and Financial Intermediation” By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  6. Growth models in advanced countries before and after the 2008 crisis: competitiveness, financial cycles and austerity By Karsten Kohler; Engelbert Stockhammer
  7. Labor Share Heterogeneity and Fiscal Consolidation Programs By Pedro Brinca; Bruno Freitas; Margarida Isabel Mano Tavares Simões Lopes Marques Almeida
  8. Intermediation in the Interbank Lending Market By Ben R. Craig; Yiming Ma
  9. Fiscal Consolidation and the Current Account: OECD Evidence By Christian Breuer; Chang Woon Nam
  10. Introducing a New Index of Households' Macroeconomic Conditions By Martin Hodula; Simona Malovana; Jan Frait
  11. Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis By Emil Verner; Győző Gyöngyösi
  12. Sectoral Okun's Law and Cross-Country Cyclical Differences By Eiji Goto; Constantin Bürgi;
  13. The Impact of Consumer Protection in the Digital Age: Evidence from the European Union By Anja Rösner; Justus Haucap; Ulrich Heimeshoff

  1. By: Balduzzi, Pierluigi (Boston College); Brancati, Emanuele (Sapienza University of Rome); Brianti, Marco (Boston College); Schiantarelli, Fabio (Boston College)
    Abstract: We study the effects on financial markets and real economic activity of changes in risk related to political events and policy announcements in Italy during the 2013-2019 period that saw the rise to power of populist parties. We focus on events that have implications for budgetary policy, debt sustainability and for Euro membership. We use changes in the Credit Default Swaps (CDS) spread on governments bonds around those dates as an instrument for shocks to policy and institutional risk – political risk for short – in the context of Local Projections - IV. We show that shocks associated with the rise of populist forces or their policies have adverse and sizable effects on financial markets. These negative effects were moderated by European institutions and domestic constitutional constraints. In addition, Italian political developments generate international spillover effects on the spreads of some other euro-zone countries. Finally, political risk shocks have a negative impact on the real economy, although the accommodating stance of monetary policy helped in cushioning their effect.
    Keywords: populism, political risk, policy uncertainty, sovereign debt, fiscal policy, CDS spread
    JEL: E44 G10 H62 H63
    Date: 2020–01
  2. By: Alberto Fuertes Mendoza (Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.)
    Abstract: This paper analyzes the behaviour of the external adjustment path for the fourmain economies in the euro area. I find a structural break in the behaviour of thenet external position at the time of the introduction of the euro for France, Italyand Spain, pointing out that the inception of the common currency changed theirexternal adjustment process. Germany does not show this structural break, beingits external position more affected by other events such as the country reunificationin 1989. I also find that France and Italy will adjust the net external position mainlythrough the valuation component, while Germany and Spain will restore their externalbalance mostly through the trade component. The common currency area exacerbatedGermany’s net creditor position as the evolution of the euro has reacted to the externaladjustment needs of debtor countries such as Italy and Spain.
    Keywords: External Adjustment; Exchange Rate Regime; Structural Breaks; Valuation Adjustment.
    Date: 2020
  3. By: Sampson, Thomas; Breinlich, Holger; Leromain, Elsa; Novy, Dennis
    Abstract: We study the impact of the 2016 Brexit referendum on UK foreign direct investment. Using the synthetic control method to construct appropriate counterfactuals, we show that by March 2019 the Leave vote had led to a 17% increase in the number of UK outward investment transactions in the remaining EU27 member states, whereas transactions in non-EU OECD countries were unaffected. These results support the hypothesis that UK companies have been setting up European subsidiaries to retain access to the EU market after Brexit. At the same time, we find that the number of EU27 investment projects in the UK has declined by around 9%, illustrating that being a smaller economy than the EU leaves the UK more exposed to the costs of economic disintegration.
    Keywords: Brexit; foreign direct investment; synthetic control method
    JEL: F15 F21 F23
    Date: 2019–07
  4. 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 international 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 motives 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 determination of international reserve compositions.
    Keywords: International reserves,central banks,euro crisis
    JEL: E58 F31 G01
    Date: 2020
  5. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: A technical appendix for “International Business Cycle and Financial Intermediation.” The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2020–02
  6. By: Karsten Kohler (King’s College London); Engelbert Stockhammer
    Abstract: The paper contributes to the recent growth models debate through a cross-country analysis of macroeconomic growth drivers after the 2008 crisis. It examines the role of competitiveness, finance, and fiscal policy as sources of foreign, private and public demand. While all countries experienced a slowdown in economic growth and a stronger export-orientation, macroeconomic performance has been highly uneven. Growth drivers have partly changed, calling for reconsideration of some key topics in the growth models debate. We argue that (i) non-price competitiveness has gained importance compared to price competitiveness, (ii) debt-driven growth models are cyclical and financial booms come with busts and debt overhang, (iii) post-crisis growth models are strongly shaped by fiscal policy. Northern Europe reinforced its export-orientation despite some wage and property price inflation, but with limited effects on growth. Eastern Europe benefitted from an improvement in export sophistication prior to the crisis and outperforms in terms of growth. Southern Europe underwent a debt-driven depression, exacerbated by contractionary austerity policies. While also affected by the downturn of a financial cycle, the English-speaking countries sustained demand through slower fiscal consolidation.
    Keywords: growth models, austerity, financial cycles, comparative political economy, post-Keynesian macroeconomics
    JEL: B50 O47 O57
    Date: 2020–03
  7. By: Pedro Brinca (Nova School of Business and Economics (SBE)); Bruno Freitas (Nova School of Business and Economics (SBE)); Margarida Isabel Mano Tavares Simões Lopes Marques Almeida (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)
    Abstract: We show that the labor share of income is an important factor affecting the mechanisms behind fiscal consolidation programs, thus requiring consideration when evaluating fiscal multipliers across countries. We calibrate a life-cycle, overlapping generations model to match key characteristics of different European economies and evaluate the recessive impacts of fiscal consolidation programs. We find a positive relationship between the labor share and the impact fiscal multipliers generated by our model. This result directly follows from the higher weight of labor on production and the lower opportunity cost of leisure present in economies with a higher labor share. Following the impact period, the relationship between the labor share and the fiscal multipliers is dependent on the type of fiscal instrument employed in the consolidation.
    Keywords: Political connections, Gender diversity, Bank performance, ECB, GMM; Fiscal Consolidation,Labor Share,Fiscal Multipliers,Public Debt.
    JEL: D33 E21 E62 H31
    Date: 2020–04
  8. By: Ben R. Craig (Indiana University Bloomington; Federal Reserve Bank; Deutsche Bundesbank); Yiming Ma
    Abstract: This paper studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks and that shocks to these intermediary banks in the financial crisis spill over to the activities of the periphery banks. We then develop a network model in which banks trade off the costs and benefits of link formation to explain these patterns. The model is structurally estimated using banks’ preferences as revealed by the observed network structure in the precrisis period. It explains why the interbank intermediation arrangement arises, estimates the frictions underlying the arrangement, and quantifies how shocks are transmitted across the network. Model estimates based on precrisis data successfully predict changes in network-links and in lending arising from the crisis in out-of-sample tests. Finally, we quantify the systemic risk of a single intermediary and the impact of ECB funding in reducing this risk through model counterfactuals.
    Date: 2020–03–05
  9. By: Christian Breuer; Chang Woon Nam
    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 previous 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 effect 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
  10. By: Martin Hodula; Simona Malovana; Jan Frait
    Abstract: We construct a novel index of households' macroeconomic conditions for 22 high-income European countries between 2002 Q1 and 2018 Q4. The resulting index is in line with the broad features of the countries' business cycles and captures households' economic well-being. We discuss the complementary character of the proposed index in relation to widely employed survey-based consumer confidence indicators. We show that households' expectations are tightly linked to current macroeconomic conditions. This finding echoes the literature linking consumer attitudes and economic development. In a single-country case study, we provide empirical evidence that links the proposed index to new credit extended to households. The evidence suggests that households need a longer period of good macroeconomic conditions to decide to take on a mortgage than they do in the case of a consumer loan.
    Keywords: Composite index, factor analysis, households' confidence, loan growth
    JEL: F12 F41 F43
    Date: 2019–12
  11. By: Emil Verner (Massachusetts Institute of Technology); Győző Gyöngyösi (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: We examine the consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary’s late-2008 currency crisis. The revaluation of debt burdens leads to higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by employment losses at non-exporting firms, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into a multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets.
    Keywords: Fiscal household debt, foreign currency debt, currency crisis, financial crisis, business cycles
    JEL: E2 E3 G2 F3 D12
    Date: 2020
  12. By: Eiji Goto; Constantin Bürgi;
    Abstract: We estimate Okun’s law, the negative relationship between output and the unemployment rate, at the sector level for the US, the UK, Japan, and Switzerland to test several hypotheses that may explain why the aggregate Okun’s coeffcients are different across countries. Specifically, we show that the sectoral composition is not a driver and find that the sectoral coefficients are proportional to the aggregate in all four countries. We also show that the standard deviation of unemployment is the main driver of the cross-country differences. This is consistent with labor market policies being crucial to explain the cross-country cyclical differences in the aggregate Okun’s coefficient.
    Keywords: Okun’s law, cross-country differences, sectors
    JEL: E24 E32
    Date: 2020
  13. By: Anja Rösner; Justus Haucap; Ulrich Heimeshoff
    Abstract: We investigate the effect of an EU-wide consumer protection regulation on consumer trust as well as consumer behavior. The Unfair Commercial Practice Directive (UCPD) was implemented by EU member states between 2007 and 2010. We utilize data from the Special and Flash Eurobarometer for the years between 2006 and 2014 and experts’ evaluation on consumer protection levels before the introduction of the regulation. This rich data set allows us to apply a difference-in-difference estimator with multiple time periods. We find a significant relationship between the introduction of the UCPD and consumer trust and cross-border purchases for countries with a low consumer protection level before the introduction of the UCPD. The relationship increases over time and stays then relatively constant.
    Keywords: consumer protection, UCPD, B2C, e-commerce, consumer trust, cross-border purchase
    JEL: D18 K20 L50 L51
    Date: 2020

This nep-eec issue is ©2020 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.