nep-eec New Economics Papers
on European Economics
Issue of 2020‒04‒27
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A fiscal capacity for the euro area: lessons from existing fiscal-federal systems By Burriel, Pablo; Chronis, Panagiotis; Freier, Maximilian; Hauptmeier, Sebastian; Reiss, Lukas; Stegarescu, Dan; Van Parys, Stefan
  2. International capital flows at the security level: evidence from the ECB’s Asset Purchase Programme By Fidora, Michael; Schmitz, Martin; Bergant, Katharina
  3. Fiscal expenditure spillovers in the euro area: an empirical and model-based assessment By Alloza, Mario; Ferdinandusse, Marien; Jacquinot, Pascal; Schmidt, Katja
  4. Asymmetric macroeconomic stabilization and fiscal consolidation in the OECD and the Euro Area By Pierre Aldama; Jérôme Creel
  5. On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions By Georgoutsos, Dimitris; Moratis, George
  6. Baldwin vs. Cecchini revisited: the growth impact of the European Single Market By Sondermann, David; Lehtimäki, Jonne
  7. Do EU Fiscal Rules Support or Hinder Counter-Cyclical Fiscal Policy? By Martin Larch; Eloise Orseau; Wouter Van Der Wielen
  8. A framework for assessing the costs of pension reform reversals By Baksa, Daniel; Munkacsi, Zsuzsa; Nerlich, Carolin
  9. Avoiding Sovereign Default Contagion: A Normative Analysis By Sergio De Ferra; Enrico Mallucci
  10. The impact of credit for house price overvaluations in the euro area: Evidence from threshold models By Dreger, Christian; Gerdesmeier, Dieter; Roffia, Barbara
  11. The productivity puzzle and the Kaldor-Verdoorn law: the case of Central and Eastern Europe By Hubert Gabrisch
  12. Effectiveness of Corona Lockdowns: Evidence for a Number of Countries By Homburg, Stefan

  1. By: Burriel, Pablo; Chronis, Panagiotis; Freier, Maximilian; Hauptmeier, Sebastian; Reiss, Lukas; Stegarescu, Dan; Van Parys, Stefan
    Abstract: After the financial and economic crisis in Europe, a broad consensus has emerged that a stronger fiscal dimension may be needed to complete the architecture of Economic and Monetary Union (EMU). This paper analyses the performance of interregional transfers in existing fiscal-federal systems, notably in Austria, Belgium, Germany, Spain and the United States, and aims to draw lessons for the design of a euro area fiscal instrument. The empirical risk-sharing analysis in this paper suggests that effective cross-regional stabilisation of asymmetric shocks tends to work via direct cash transfers to households, such as unemployment benefits, which are financed out of cyclical central government taxes and social security contributions. This would suggest that a euro area budgetary instrument for stabilisation should be designed as a tool that enhances the automatic stabilisation capacity in the single currency area. At the same time, it seems important that a prospective central stabilisation instrument for the euro area would be integrated in an overall fiscal policy framework that ensures proper incentives for national policymakers. JEL Classification: E62, H11, H77
    Keywords: euro area fiscal capacity, fiscal federalism, fiscal risk-sharing
    Date: 2020–04
  2. By: Fidora, Michael; Schmitz, Martin; Bergant, Katharina
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Based on net transactions of domestic and foreign securities, we observe euro area sectors' capital flows into individual securities, cleaned from valuation effects. Our empirical analysis – which accounts for security-level characteristics – 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. JEL Classification: F21, F42, E52, G15
    Keywords: capital flows, international investment patterns, investor heterogeneity, quantitative easing, sovereign debt
    Date: 2020–04
  3. By: Alloza, Mario; Ferdinandusse, Marien; Jacquinot, Pascal; Schmidt, Katja
    Abstract: The paper describes the main transmission channels of the spillovers of national fiscal policies to other countries within the euro area and investigates their magnitude using different models. In the context of Economic and Monetary Union (EMU), fiscal spillovers are relevant for the accurate assessment of the cyclical outlook in euro area countries, as well as in the debates on a coordinated change in the euro area fiscal stance and on a euro area fiscal capacity. The paper focuses on spillovers from expenditure-based expansions by presenting two complementary exercises. The first is an empirical investigation of spillovers based on a new, long quarterly dataset for the largest euro area countries and on new estimates based on annual data for a panel of 11 euro area countries. The second uses a multi-country general equilibrium model with a rich fiscal specification and the capacity to analyse trade spillovers. Fiscal spillovers are found to be heterogeneous but generally positive among euro area countries. The reaction of interest rates to fiscal expansions is an important determinant of the magnitude of spillovers.
    Keywords: DSGE., fiscal policy, fiscal spillovers, monetary policy, VAR
    Date: 2020–04
  4. By: Pierre Aldama (Banque de France and Sciences Po, OFCE); Jérôme Creel (Sciences Po, OFCE and ESCP)
    Abstract: This paper presents empirical evidence of asymmetric fiscal policy along the business cycle, using a real-time panel data on 19 OECD countries. We estimate various specifications of fiscal policy rules, in which ex ante fiscal policy has two major objectives: macroeconomic stabilization and fiscal consolidation. First, we find that a symmetric fiscal policy rule may not be an accurate representation of real-time fiscal policy. We find evidence in favor of asymmetric fiscal policy, in particular regarding the response to output gap. Second, fiscal policy appears to be generally procyclical in downturns and a-cyclical in upturns, typically in the Euro Area and during the crisis. Third, we do not find significant evidence of a procyclical fiscal consolidation in the OECD and the Euro Area, although surplus-debt feedback coefficients are generally larger in downturns. Our results are robust to an alternative measure of business cycle and to country exclusion.
    Keywords: Fiscal policy rules, real-time data, asymmetric stabilization, fiscal consolidation
    JEL: E61 E62 H6
    Date: 2020–03
  5. By: Georgoutsos, Dimitris; Moratis, George
    Abstract: We examine the informative value of the 2016 and 2018 supervisory EU stress tests on the basis of the bank stock and CDS abnormal returns they have caused. Our conclusions are based on results from event study analysis and from regressions on the determinants of bank stocks’ abnormal returns. We conclude that the 2018 stress test has been comparatively more informative for investors but only for a sub-group of banks based on sovereign debt-ridden and non-Eurozone countries. The robustness of our results is tested by applying an exhaustive set of event study test statistics on abnormal returns generated from both single and Fama-French factor models. The equity Tier I, leverage and profitability ratios are important determinants of abnormal bank stock returns for the same group of countries as in the event study analysis. Non-linear reactions highlight the fact that investors assign varying degrees of importance on the information they get from the stress tested financial ratios. Overall, our results substantiate the claim that the recent EU stress tests have been calibrated towards revealing the weaknesses of the banking sectors of peripheral Eurozone and non-Eurozone countries.
    Keywords: EBA stress tests, event study analysis, factor models, quantile regression analysis
    JEL: G28
    Date: 2020–02
  6. By: Sondermann, David; Lehtimäki, Jonne
    Abstract: The European Single Market created a common market for millions of Europeans. However, thirty years after its introduction, it appears that the benefits of the common European project are occasionally being questioned at least by some parts of the population. Others, by contrast, strive for deeper integration. Against this background, we empirically gauge the growth effect that arose from the Single Market. Using the Synthetic Control Method, we establish the growth premium for the Single Market overall and for its founding members. Broadly in line with the predictions made by Baldwin (1989) at the onset of the Single Market project, we find significantly higher real GDP per capita for the overall Single Market area of around 12-22%. In comparison, smaller EU Member States seem to have benefited somewhat more compared to larger countries. The estimated growth effects underline the case for further deepening and broadening the Single Market where possible. JEL Classification: F13, F14, F15, N14
    Keywords: economic growth, Single Market, synthetic control method
    Date: 2020–04
  7. By: Martin Larch; Eloise Orseau; Wouter Van Der Wielen (European Commission - JRC)
    Abstract: Rather than stabilising aggregate demand, discretionary fiscal policy tends to amplify cyclical fluctuations of output. The commonly accepted reasons are political economy and uncertainty. In the EU, the pro-cyclical nature of discretionary fiscal policy has also been associated with the commonly agreed fiscal rules, which, for some observers, unduly limit the scope for stabilising output. Using panel data covering close to 50 EU and non-EU countries, we provide evidence that the uncertainty around output gap estimates is not a convincing explanation for pro-cyclical policies. Discretionary measures remain ill-timed from a stabilisation perspective even when observable and politically more meaningful indicators of the cycle are used. We also show that deviations from fiscal rules and the accumulation of government debt foster pro-cyclical fiscal policy. Lawmakers can run discretionary fiscal policy measures based on political economy considerations up to a point. Once debt grows too high, they are forced to implement fiscal consolidation measures regardless of the cycle. More generally, there is no fiscal rule, which, if consistently ignored, safeguards the opportunity to stabilise output with discretionary fiscal policy measures. Complying with fiscal rules that are designed to keep a steady course in the face of cyclical fluctuation is conducive to counter-cyclical fiscal policy making.
    Keywords: fiscal policy, fiscal rules, fiscal stabilisation, counter-cyclical policy, dynamic panel models
    JEL: C23 E61 E62 H30 H60
    Date: 2020–04
  8. By: Baksa, Daniel; Munkacsi, Zsuzsa; Nerlich, Carolin
    Abstract: Several European countries are currently considering reversing parts of their pension reforms that were adopted previously to improve sustainability. In this paper we present a framework that allows us to quantify the macroeconomic and fiscal costs of such reversals. We thereby integrate the country-specific information from the latest Ageing Report into a dynamic general equilibrium model with overlapping generations. Focusing on Germany and Slovakia as country cases, our model replicates the Ageing Report's pension expenditure projections very well. We calculate the macroeconomic impact of first the additional pension reforms needed to contain the public debt pressures arising from population ageing and second the costs of reform reversals. Our model results show that undoing past pension reforms would generate substantial adverse macroeconomic costs and could pose challenges for fiscal sustainability. JEL Classification: H55, J11, J26
    Keywords: Ageing Report, overlapping generations model, population ageing, public pension, reform reversals
    Date: 2020–04
  9. By: Sergio De Ferra; Enrico Mallucci
    Abstract: Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be replicated in a decentralized setting with Pigouvian taxes on debt.
    Keywords: Sovereign default; Sovereign contagion; Bailouts; Pigouvian taxes
    JEL: F34 F41 F45 H63
    Date: 2020–02–27
  10. By: Dreger, Christian; Gerdesmeier, Dieter; Roffia, Barbara
    Abstract: The critical role of house prices for macroeconomic and financial stability is widely acknowl-edged since the global financial crisis. While house prices showed spectacular increases and even a bubble-like behaviour in the pre-crisis years, their fall thereafter was accompanied by deep recessions in many countries. Loose monetary conditions, such as the easy availability of credit, are often blamed to be fuelling such booms. In this paper, the link between credit and house prices is investigated for the euro area in a nonlinear model framework. This choice is motivated by the idea that the linkages between these two variables can be governed by a regime-switching behaviour. Threshold VAR (TVAR) models are estimated, which comprise real house price and credit developments, business and monetary conditions. Optimal breakpoints are determined via a grid search. The relationship between the variables is not stable. If output growth and interest rate changes serve as thresholds, two regimes can be distinguished. Conversely, if house prices and credit control the regime change, three regimes are more appropriate. Nonlinear impulse responses suggest that credit developments respond to house prices, while the reverse causality is less significant. Thus, the modest recovery of credit at the current edge can only be partially attributed to the recent acceleration of house prices in the euro area.
    Keywords: Threshold models, house prices and credit, regime switching
    JEL: C34 E31 E52
    Date: 2020–03
  11. By: Hubert Gabrisch (Wiesbaden Institute for Law and Economics (WILE))
    Abstract: This study attempts to identify the short- and long-run components of the Kaldor-Verdoorn (KV) law in empirical economics. The law claims that demand dynamics drive productivity dynamics. The law is tested with a panel of ten Central and Eastern-European countries, where labour productivity and demand growth have been slowing since 2004/2006 and where fears of an end of convergent growth are spreading. Meanwhile, the gradual slowing of output and productivity growth applies not only to the region considered in this study, but it is also a global phenomenon that is occurring despite remarkable technical progress and that is referred to as the so-called productivity puzzle. However, this puzzle would be solved in light of the KV law. To test for the short-term and long-term properties of this law, least squares and autoregressive distributed lag (ARDL) models are applied. Our results confirm the law for the region; slower productivity growth is not due to 'adverse technological progress' but to weakening external and domestic demand.
    Keywords: Productivity conundrum, Kaldor-Verdoorn law, panel autoregressive distributed lag (ARDL) model, Eastern Europe.
    JEL: C23 E24 O47
    Date: 2020
  12. By: Homburg, Stefan
    Abstract: The paper assesses the effectiveness of the large-scale lockdowns that took place during the SARS-CoV-2 (corona) pandemic. Countries considered include the United States, South Korea, Germany, Austria, Switzerland, Italy, Spain, and Sweden. Our research strategy utilizes the fact that fatal outcomes follow infections with a delay of 23 days. Therefore, the dates of the actual infections can be inferred from the data. The results suggest that lockdowns were superfluous and ineffective.
    Keywords: Corona, SARS-CoV-2, COVID-19, Lockdown
    JEL: I18
    Date: 2020–04

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