nep-eec New Economics Papers
on European Economics
Issue of 2020‒03‒23
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Senior bank loan officers' expectations for loan demand: Evidence from the Euro-area By Anastasiou, Dimitrios
  2. International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme By Katharina Bergant; Michael Fidora; Martin Schmitz
  3. Preference and policy formation in international bureaucracies during crises: evidence from the European Commission’s policies on debt-management By Angelou, Angelos
  4. Credit, banking fragility and economic performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  5. Polish GDP Forecast Errors: A Tale of Ineffectiveness By Rybacki, Jakub
  6. What is the information value of bank's stress tests? An investigation using banks' bond split ratings By Moustapha Daouda Dala; Isabelle Distinguin; Alain Sauviat
  7. Economic Policy Uncertainty in Small Open Economies: a Case Study in Ireland By Rice, Jonathan
  8. Identifying Service Market Reform Priorities in Italy By Nazim Belhocine; Daniel Garcia-Macia
  9. Is the Phillips curve dead? International evidence By Alexius, Annika; Lundholm, Michael; Nielsen, Linnea
  10. Bank Survival in Central and Eastern Europe By Evzen Kocenda; Ichiro Iwasaki
  11. Productivity in Europe: Trends and drivers in a service-based economy By Peter Bauer; Igor Fedotenkov; Aurelien Genty; Issam Hallak; Peter Harasztosi; David Martinez Turegano; David Nguyen; Nadir Preziosi; Ana Rincon-Aznar; Miguel Sanchez Martinez
  12. Labor Costs and Corporate Investment in Italy By Daniel Garcia-Macia

  1. By: Anastasiou, Dimitrios
    Abstract: We employ senior bank loan officers' responses regarding actual and expected loan demand from enterprises linking successive surveys in order to determine the dominant expectation formation mechanism that best describes European senior bank loan officers’ expectations. We utilize quarterly data for loan demand from enterprises from the European Bank Lending Survey for 14 Euro-area countries spanning the period 2003Q1 to 2019Q4. Our findings suggest that the adaptive expectations mechanism is compatible with senior bank loan officers' expectations for loan demand from enterprises. Our study contributes to the understanding of the formation of loan demand expectations and hence our findings can be very useful for monetary policy purposes.
    Keywords: Adaptive expectations; bank lending survey; loan demand; survey‐based expectations
    JEL: C33 C5 D84 G2 G21
    Date: 2020–01
  2. By: Katharina Bergant; Michael Fidora; Martin Schmitz
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Our empirical analysis shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Date: 2020–02–28
  3. By: Angelou, Angelos
    Abstract: This paper discusses the conditions under which international bureaucracies might oppose member-state preferences during financial crises. It employs the deviant case of the European Commission and its debt-management suggestions at the beginning of the recent Eurozone crisis to answer this enquiry. It asks why the European Commission stood against the debtrelief preferences of its principals during the private-sector involvement (PSI) period. By using data from grey literature sources, elite interviews and secondary accounts, it suggests that the Commission acted as an autonomous bureaucracy in the field of debt management. Its pro-integration culture, which was tied with the preservation of the Eurozone project via market-appeasing policies, drove its debt-management preferences and suggestions. This insight demonstrates that institutional culture can play a central role even during crises. It shows that when there is significant discrepancy between the international bureaucracy’s culture and the crisis-management preferences of the member-states, the former might come up with suggestions that go against state preferences. The paper’s insights run contrarily to the existing state-centric narratives about the Commission’s role in the recent crisis. They also provide nuances to the existing research on the behavior of international bureaucracies during financial crises.
    Keywords: European Commission; crisis-management; international bureaucracies
    JEL: N0
    Date: 2019–12–01
  4. By: Jérôme Creel (Sciences Po-OFCE, ESCP Europe); Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE - Sciences Po-OFCE)
    Abstract: Drawing on European Union data, this paper investigates the hypothesis that private credit and banking sector fragility may affect economic growth. We capture banking sector fragility both with the ratio of bank capital to assets and non-performing loans. We assess the effect of these three variables on the growth rate of GDP per capita, using the Solow growth model as a guiding framework. We observe that credit has no effect on economic performance in the EU when banking fragilities are high. However, the potential fragility of the banking sector measured by the non- performing loans decreases GDP per capita.
    Keywords: Private credit, Capital to assets ratio, Non-performing loans
    JEL: G10 G21 O40
    Date: 2020–01
  5. By: Rybacki, Jakub
    Abstract: The aim of this paper is to evaluate gross domestic product (GDP) forecast errors of Polish professional forecasters based on the individual data from the Rzeczpospolita daily newspaper. This dataset contains predictions on forecasting competitions during the years 2013–2019 in Poland. Our analysis shows a lack of statistical effectiveness of these predictions. First, there is a systemic negative bias, which is especially strong during the years of conservative PiS government rule. Second, the forecasters failed to correctly predict the effects of major changes in fiscal policy. Third, there is evidence of strategic behaviors; for example, the forecasters tended to revise their prognosis too frequently and too excessively. We also document herding behavior, i.e., an alignment of the most extreme forecasts towards market consensus with time, and an overly strong reliance on forecasts from NBP inflation projections in cases of estimates for longer horizons.
    Keywords: GDP forecasting
    JEL: E32 E37
    Date: 2020–01–28
  6. By: Moustapha Daouda Dala (Epoka University, Department of Banking and Finance, Rruga Tirane-Rinas Km 12, 1032, Vore, Tirana, Albania); Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: We study the informative value of stress tests by investigating the impact of the disclosure of their results on banks' bonds split ratings taken as a measure of bank opacity. We consider bonds jointly rated by Moody's and Standard & Poor's and issued by banks that participated to the European and US banks' stress tests. Our results suggest that the disclosure of stress results has mixed effect on split ratings. Our findings also suggest a frequent divergence of interpretation of the stress test results between the two rating agencies meaning that information would not be as relevant as hoped by regulators. Market players certainly could not extract an unambiguous signal from all the results disclosed by the stress tests.
    Keywords: stress tests,credit rating,split rating,banks' opacity
    Date: 2020–02–12
  7. By: Rice, Jonathan (Allied Irish Banks)
    Abstract: The main contribution of this paper is the construction of a measure of Economic Policy Uncertainty (EPU) for Ireland, following the methodology of Baker, Bloom and Davis (2016). The paper also sheds light on the implications of heightened uncertainty for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real economic activity, only when interest rates do not react, or are constrained. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.
    JEL: E5 G01 G17 G28 R39
    Date: 2020–01
  8. By: Nazim Belhocine; Daniel Garcia-Macia
    Abstract: Italy’s labor productivity in market services has declined since 2000, underperforming manufacturing and peer European countries, especially in strongly regulated sectors. A model of monopolistic competition is used to identify which service sectors would benefit more from removing entry and/or exit barriers. Using Italian firm-level data, the paper finds that sectors with high markups, such as professional services, would primarily benefit from removing entry barriers. Sectors with a large mass of unproductive firms, such as retail, would instead benefit from removing exit barriers. Policy recommendations to improve efficiency are outlined in relation to the sectoral priorities identified in the data.
    Date: 2020–02–21
  9. By: Alexius, Annika (Dept. of Economics, Stockholm University); Lundholm, Michael (Dept. of Economics, Stockholm University); Nielsen, Linnea (Wahlstedt Sageryd)
    Abstract: As the struggle against low inflation intensifies, renewed attention is focusing on the potential instability of the relationship between labor market demand pressure and inflation. A weaker Phillips curve has mainly been documented for the United States. Since it is unlikely that this phenomenon is limited to a single country, more international evidence is required. We analyse changes in the slope of the Phillips curve in eleven OECD countries (including the United States for comparison). Bayesian VAR models with time varying parameters indicate that relationship between inflation and unemployment has strengthened rather than weakened. Shocks to unemployment typically have significant effects on inflation in 2018, indicating that the Phillips curve is still alive and well. The statistical method may matter for the results as rolling window estimation shows a weakened relationship in six out of ten non-US countries.
    Keywords: Inflation; Phillips Curve; Bayesian time-varying parameter VARs;
    JEL: E31 F41
    Date: 2020–03–10
  10. By: Evzen Kocenda (Institute of Economic Studies, Charles University); Ichiro Iwasaki (Institute of Economic Research, Hitotsubashi University)
    Abstract: We analyze factors linked to bank survival on large dataset covering 17 CEE markets during the period of 2007-2015 by estimating the Cox proportional hazards model. We group banks across countries and according to their financial soundness. The overall financial development improves survival probabilities and its impact exhibits decreasing marginal returns as it is strongest in countries with lower level of financial development and banking reforms and in banks with low level of solvency. Measures of ownership structure, legal form, and corporate governance are the key economically significant factors that exhibit strongest economic effect on bank survival. Financial performance indicators predict bank survival rate with intuitively expected positive impact but their effect, in terms of economic significance, is smaller in comparison to other factors as well as the impact found in developed markets. Effect of above factors is most pronounced for banks with low financial soundness in term of their solvency. Results also appear to indicate that it makes exit more likely during the global financial crisis (GFC), shortly afterwards, and during the initial stage of the European sovereign debt crisis. The results are robust with respect to size, age, and alternative assumptions on survival distribution.
    Keywords: bank survival, banking reform, European emerging markets, survival and exit determinants, hazards model
    JEL: C14 D02 D22 G33
    Date: 2020–03
  11. By: Peter Bauer (European Commission - JRC); Igor Fedotenkov (European Commission - JRC); Aurelien Genty (European Commission - JRC); Issam Hallak (European Commission - JRC); Peter Harasztosi (European Commission - JRC); David Martinez Turegano (European Commission - JRC); David Nguyen (National Institute of Economic and Social Research); Nadir Preziosi (European Commission - JRC); Ana Rincon-Aznar (National Institute of Economic and Social Research); Miguel Sanchez Martinez (European Commission - JRC)
    Abstract: High levels of labour productivity growth are a key element to maintaining high standards of living in the long run in Europe. However, the EU has been experiencing a significant slowdown in labour productivity and total factor productivity growth, a phenomenon which has even exacerbated over the last decade, contrary to what would be expected in the recovery from the financial crisis. The trends and driving forces of the current sluggish productivity growth in Europe are analysed in this report with a special emphasis on services. After reviewing the literature in the field, the report zooms in on the role played by factors such as structural change, intangible investments, firm size distribution, firm demography, labour dynamics, zombie firms, business cycle dynamics and public expenditure and assesses their impact on productivity growth based on a variety of data sources and methodologies. The report focusses on the main results at EU level and includes some cross-country and cross-sectoral comparisons wherever possible.
    Keywords: productivity puzzle, structural change, intangible assets, public expenditure, business cycles, creative job destruction, firm entry, firm exit, firm size, zombie firms, Member States, service sectors
    Date: 2020–03
  12. By: Daniel Garcia-Macia
    Abstract: The recovery of private investment in Italy has lagged its euro area peers over the past decade. This paper examines the role of elevated labor costs in hindering the recovery. Specifically, labor costs rose faster than labor productivity prior to the global financial crisis and have remained high since, weighing on firms’ profits, capital returns, and thus capacity to invest. Empirical analysis provides evidence for the impact of wages on investment at the sectoral and firm levels. Sectoral wage growth seems unrelated to sectoral productivity growth, but is negatively associated with investment. Firm-level data permit a better identification—by exploiting the interaction between sectoral wage growth (exogenous to the firm) and the lagged labor share of the firm. A 1 percent increase in real wages is estimated to cause a 1/3 percent fall in fixed capital. Profits absorb only ½ of the cost increase, pointing to the role of liquidity constraints. These results highlight the need for labor market reform to reinvigorate investment, and thus labor productivity and job creation.
    Date: 2020–02–21

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