nep-eec New Economics Papers
on European Economics
Issue of 2020‒03‒30
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Brexit and the Euro By Nauro F Campos; Corrado Macchiarelli
  2. Why narrative information matters: Evidence from the asset purchase program of the ECB By Frederic Opitz
  3. Demographics and inflation in the euro area: a two-sector new Keynesian perspective By Lis, Eliza; Nickel, Christiane; Papetti, Andrea
  4. Global and local currency effects on euro area investment in emerging market bonds By Martijn Boermans; John Burger
  5. Implications of negative interest rates for the net interest margin and lending of euro area banks By Melanie Klein
  6. Investigating the influence Brexit had on Financial Markets, in particular the GBP/EUR exchange rate By Michael Filletti
  7. Exchange rate shocks and inflation comovement in the euro area By Leiva-Leon, Danilo; Martínez-Martin, Jaime; Ortega, Eva
  8. Political Budget Cycles in the Eurozone By Frederico Silva Leal
  9. Decarbonizing Trade Policy. Options towards a European Decarbonized Trade Policy By Mehdi Abbas
  10. A new assessment of the Troika ´s economic policy for Portugal in 2012 following an Input-Output approach By José Carlos Coelho

  1. By: Nauro F Campos; Corrado Macchiarelli
    Abstract: The year 2019 marked the 20th anniversary of the establishment of the Euro. It was also the last full year before the UK formally left the European Union. This paper examines the relationship between the UK and the euro area. We look at the economic distance between core and periphery groups of countries which is driven by the level of synchronisation in economic activity. We provide new evidence that since 1990 the UK economy has become significantly more integrated with that of the EMU countries. The UK has moved from being in the periphery before 1990 to being part of the core over the following 30 years, despite not being part of the EMU. We also provide evidence that the level of business cycles synchronisation of the UK economy with the EU has had the greatest, among the EU countries, variability over time. We conclude with some policy implications arising from Brexit for the stability of the euro area. Specifically, while synchronisation might have increased the costs of Brexit, the UK exit from the EU represents much less of a threat to the stability of the euro area than the risk of a failure to further European economic integration via fiscal federalism and the banking union.
    Keywords: European Monetary Union, Eurozone, Core-periphery
    JEL: E32 E63 F02
    Date: 2020–03
  2. By: Frederic Opitz (-)
    Abstract: In this paper, I evaluate the effects of public sector purchase program announcement shocks in the Euro area estimating a Bayesian VAR with sign-restrictions augmented by narrative information taken from event studies. Using monthly data, I find that the shocks persistently increase inflation and output. The exchange rate, market volatility, borrowing costs, and systemic risk fall while the quantity of household credit and economic and consumer sentiment rises. Most importantly, I find that the additional narrative information substantially reduces the uncertainty around these effects, shedding new light on the effectiveness and the pass-through of unconventional monetary policy
    Keywords: Unconventional monetary policy, APP, Narrative sign-restrictions
    JEL: E50 E51 E52 E58
    Date: 2020–03
  3. By: Lis, Eliza; Nickel, Christiane; Papetti, Andrea
    Abstract: Can the aging process affect inflation? The prolonged decline of fertility and mortality rates induces a persistent downward pressure on the natural interest rate. If this development is not internalized by the monetary policy rule, inflation can be on a downward trend. Using the structure of a two-sector overlapping generations model embedded in a New-Keynesian framework with price frictions, calibrated for the euro area, this paper shows that following a commonly specified monetary policy rule the economy features a ”disinflationary bias” since 1990, in a way that can match the downward trend of core inflation found in the data for the euro area. In this model, continuing to follow the same rule makes inflation to be on a declining pattern at least until 2030. At the same time, changing consumption patterns towards nontradable items such as health-care generate a small ”inflationary bias” a positive deviation of inflation from target of less than 0.1 percentage points between 1990 and 2030. In the model setting of this paper, this inflationary bias is not strong enough to counteract the disinflationary bias generated by the downward impact of aging on the natural interest rate. JEL Classification: E43, E52, E58, J11
    Keywords: consumption composition, euro area, inflation, monetary policy, population aging
    Date: 2020–03
  4. By: Martijn Boermans; John Burger
    Abstract: We analyze how global and local factors affect portfolio allocation by euro area investors in emerging markets at the bond-level. First, cross-sectional analysis reveals a strong preference for home (Euro) currency bonds. Second, panel regressions, whether at the bond or aggregate flows level, consistently identify trade-weighted US dollar fluctuations as the most robust explanatory variable, in sharp contrast to other global factors, such as the VIX and Fed or ECB monetary policy, which have much less impact on reallocations to emerging market bonds. Our results are consistent with the notion that broad US dollar movements act as a barometer for global risk appetite, but with an important caveat: Throughout our analysis we find holdings in Euro-denominated bonds are less sensitive to global factors, which we interpret as further evidence of a home currency bias.
    Keywords: global risk; capital flows; global financial cycle; US dollar; foreign exchange rates; portfolio choice; emerging economies; spillovers; monetary policy; securities holdings statistics
    JEL: E52 F21 F3 F31 F32 G11 G15
    Date: 2020–03
  5. By: Melanie Klein
    Abstract: This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.
    Keywords: net interest margin, monetary policy, negative interest rates, bank pro tability, lending
    JEL: G21 E43 E52
    Date: 2020–03
  6. By: Michael Filletti
    Abstract: On 23rd June 2016, 51.9% of British voters voted to leave the European Union, triggering a process and events that have led to the United Kingdom leaving the EU, an event that has become known as 'Brexit'. In this piece of research, we investigate the effects of this entire process on the currency markets, specifically the GBP/EUR exchange rate. Financial markets are known to be sensitive to news articles and media, and the aim of this research is to evaluate the magnitude of impact of relevant events, as well as whether the impact was positive or negative for the GBP.
    Date: 2020–03
  7. By: Leiva-Leon, Danilo; Martínez-Martin, Jaime; Ortega, Eva
    Abstract: This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries inflation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a flexible empirical framework based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the EUR/USD exchange rate account for over 50% of nominal EUR/USD exchange rate fluctuations in more than a third of the quarters of the past six years, especially in turning point periods. Our main results indicate that headline inflation in euro area countries, and in particular its energy component, has become significantly more affected by these exogenous exchange rate shocks since the early 2010s, in particular for the region's largest economies. While in the case of headline inflation this increasing sensitivity is solely reliant on a sustained surge in the degree of comovement, for energy inflation it is also based on a higher region-wide effect of the shocks. By contrast, purely exogenous exchange rate shocks do not seem to have a significant impact on the core component of headline inflation, which also displays a lower degree of comovement across euro area countries. JEL Classification: C32, E31, F31, F41
    Keywords: exchange rate, factor model, inflation, structural VAR model
    Date: 2020–03
  8. By: Frederico Silva Leal
    Abstract: This paper provides evidencesof the electoral influence on fiscal policy in the Eurozonecountries. Using data from EA19 in 1995-2017 and a time dummy to identify election years, it was applied a Fixed Effects model to assess its impact on fiscal instruments. According to the results, the elections seemto increase both compensations to employees and other current expenditure. In addition, the politically motivated policiesseem to differ from low and highly indebted countries. Giving the electoral impact on the compensation to employees, the pro-cyclical tax strategy,and the absence of a Ricardian fiscal regime, its perceived less prudent policiesfrom the most indebted countries. Furthermore, after countries joined the EMU, policy makers beganto increase tax burden facing interest rate shocks,since they lose the ability to manipulate monetary policy.
    Keywords: Political Budget Cycles, Fiscal policy, Elections, EMU, IV-GMM
    JEL: D72 E12 E62 H62
    Date: 2020–03
  9. By: Mehdi Abbas (Pacte, Laboratoire de sciences sociales - UPMF - Université Pierre Mendès France - Grenoble 2 - UJF - Université Joseph Fourier - Grenoble 1 - IEPG - Sciences Po Grenoble - Institut d'études politiques de Grenoble - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)
    Abstract: The new European Commission, chaired by Ursula Von der Leyen, has made the environment and climate the central parameters of European policy, both internal and international, for the period 2020-2025. As such, the European Green Deal has set itself the goal of making Europe the "first climate neutral" continent by 2050. It has been five years since the Paris Agreements was agreed. This working Paper analyzes the trade policy options available to the EU for a low-carbon international trading system.
    Date: 2020–03–09
  10. By: José Carlos Coelho
    Abstract: This article proposes a new evaluation of the economic and financial adjustment programmenegotiated between Portugal and the Troika (European Commission, European Central Bank and International Monetary Fund) for the year 2012, in an Input-Output framework. As in Amaral and Lopes (2017), a comparison is made between the unemployment rate forecast for 2012 and that which would result from obtaining the implicit target for the external deficit, concluding that the unemployment rate was underestimated by almost twopercentage points. We also concluded that the achievement of the implicit targetfor the external deficit in 2012 would only be compatible with the establishment of a lower budget deficit and a lower of weight of budget deficit on GDPfor that year. Such an objective would require a smaller amount of transfers made by the Government to households and would result in greater contractions in private consumption and GDP and would result in a higher unemployment rate than that expected by the Troika for 2012.
    Keywords: unemployment, external deficit, budget deficit, Troika, Portugal
    JEL: C67 D57 E61
    Date: 2020–03

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