nep-eec New Economics Papers
on European Economics
Issue of 2020‒05‒04
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. An update of the Bank of Italy methodology underlying the estimation of price-competitiveness misalignments By Claire Giordano
  2. Monetary Policy Transmission with Downward Interest Rate Rigidity By Jean-Guillaume Sahuc; Grégory Levieuge
  3. The Euro area imbalances narrative in a Franco-German perspective: The importance of the longer-run view By Belke, Ansgar; Gros, Daniel
  4. An Unemployment Re-Insurance Scheme for the Eurozone? Stabilizing and Redistributive Effects By Mathias Dolls
  5. Macroeconomic Policy Lessons for Greece from the Debt Crisis By George Economides; Dimitris Papageorgiou; Apostolis Philippopoulos
  6. Self-defeating austerity in Portugal during the Troika's economic and financial adjustment programme By José Carlos Coelho
  7. Firms’ listings: what is new? Italy versus the main European stock exchanges By Paolo Finaldi Russo; Fabio Parlapiano; Daniele Pianeselli; Ilaria Supino
  8. Bank Deposits Flows and Textual Sentiment: When an ECB President's speech is not just a speech By Anastasiou, Dimitrios; Katsafados, Apostolos G.
  9. Unemployment across the Euro Area: The Role of Shocks and Labor Market Institutions By Zhe Wang
  10. Real implications of Quantitative Easing in the euro area: a complex-network perspective By Chiara Perillo; Stefano Battiston
  11. Are Exchange Rates Less Important for Trade in a More Globalized World? Evidence for the New EU Members By Boris Fisera; Roman Horvath
  12. The Propagation of Business Expectations within the European Union By Anja Kukuvec; Harald Oberhofer
  13. Demographic change in Switzerland: Impacts on economic growth in an Overlapping Generations Model By Hauser, Luisa-Marie; Schlag, Carsten-Henning; Wolf, André
  14. Inflationary household uncertainty shocks By Ambrocio, Gene
  15. International bank lending and corporate debt structure By José María Serena Garralda; Serafeim Tsoukas
  16. Unconventional Monetary Policies: A Stock-Taking Exercise By Jean-Guillaume Sahuc; Christian Pfister
  17. Mutual funds' performance: the role of distribution networks and bank affiliation By Giorgio Albareto; Andrea Cardillo; Andrea Hamaui; Giuseppe Marinelli

  1. By: Claire Giordano (Banca d’Italia)
    Abstract: This paper documents the recent innovations to the Bank of Italy methodology underlying the estimation of price-competitiveness misalignments , first put forward in Giordano (2018); it also provides the most recent misalignment estimates for the euro area and for its four main economies, based on five alternatively deflated indicators. The extension of the sample period, the recalibration of the trade weights employed and the significant data revisions and refinements introduced have not qualitatively modified the assessment of misalignments since 1999 for the afore-mentioned economies, although point estimates have changed non-negligibly. In the first half of 2019, no significant price competitiveness misalignment is recorded for Italy and for the euro area as a whole, whereas for France, Germany and Spain there is still evidence of a modest undervaluation.
    Keywords: price competitiveness, real effective exchange rate, equilibrium exchange rate, external imbalances
    JEL: E31 F00 F31
    Date: 2020–04
  2. By: Jean-Guillaume Sahuc; Grégory Levieuge
    Abstract: Empirical evidence suggests that the pass-through from policy to retail bank rates is asymmetric in the euro area. Bank lending rates adjust more slowly and less completely to Eonia decreases than to increases. We investigate how this downward interest rate rigidity affects the response of the economy to monetary policy shocks. To this end, we introduce asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. We find that the initial response of GDP to a negative monetary policy shock is 25% lower than its response to a positive shock of similar amplitude. This implies that a central bank would have to decrease its policy rate by 50% to 75% more to obtain a medium-run impact on GDP that would be symmetric to the impact of the positive shock. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions.
    Keywords: Downward interest rate rigidity, asymmetric adjustment costs, banking sector, DSGE model, euro area.
    JEL: E32 E44 E52
    Date: 2020
  3. By: Belke, Ansgar; Gros, Daniel
    Abstract: There is a symmetrical debate in two Euro area core countries: in France about the restrictive fiscal policy of Germany, leading to a huge external surplus, in Germany about the insufficient compliance with fiscal rules and the lack of structural reforms in France. What are the real causes of the divergence between the two economies? We show that different indicators of competitiveness yield very different results depending on the base period used, e.g. 1995 (peak of reunification boom), 1999 or 1990. A comparison with the preunification period shows little gain in competitiveness. We also find, somewhat surprisingly, that Germany's industry is not more integrated in international value chains than that of France or Italy. We then look at the link between export growth and export prices and argue that in the long run exports are not driven by competitiveness but by the increased supply of labor resulting from unification. In addition, we ask what drove 'wage moderation' in Germany: policy or the labor market. We finally analyse the longer-term trend in fiscal policy and the resulting distributional consequences in both countries. Our more general policy implication is that any analysis which compares today to the trough of German performance after unification risks over-estimating the potential of the country. Given that the 'internal unification' process is complete now, one should not expect the Germans to continue to outperform France as it has done over the last two decades.
    Keywords: France,Germany,international competitiveness,current account imbalances,wage moderation
    JEL: E62 F16 F41 F45
    Date: 2020
  4. By: Mathias Dolls
    Abstract: This paper develops a decomposition framework to study the importance of different stabilization channels of an unemployment re-insurance scheme for the euro area. Running counterfactual simulations based on household micro data for the period 2000–16, the paper finds that the re-insurance would have cushioned on average 12% (8%) of income losses through interregional (intertemporal) smoothing. These results suggest that the smoothing effect of the re-insurance which is due to asymmetries in labor market shocks would have raised the income insurance of a typical unemployment insurance scheme in the euro area by more than 50%. The simulated re-insurance scheme would have been revenue-neutral at EA-19, but not at the member-state level. Average annual net contributions would have amounted to -0.1–0.1 per cent of GDP. The paper discusses how different variants of the re-insurance might affect the risk of moral hazard.
    Keywords: European fiscal integration, unemployment re-insurance, automatic stabilizers, euro area reform
    JEL: F55 H23 J65
    Date: 2020
  5. By: George Economides; Dimitris Papageorgiou; Apostolis Philippopoulos
    Abstract: This paper first searches for the drivers of the Greek depression in the aftermath of the 2007-8 global crisis and in turn looks for engines of sustained growth. We use a micro-founded macroeconomic model calibrated to Greece. Our simulations show that the adopted adjustment program (namely, the fiscal austerity mix combined with the fiscal and monetary bailouts by the EU, ECB and IMF), jointly with the observed deterioration in institutional quality (specifically, in the degree of protection of property rights) can explain most (around 22% of GDP) of the cumulative loss in GDP in the data (around 24% of GDP) between 2009 and 2016. In particular, the adjustment program can explain a fall of around 12%, while the deterioration in property rights accounts for another 10%. Counterfactual simulations, on the other hand, show that the cumulative output loss could have been around 9% only, if the country had followed a different fiscal policy mix; if the degree of product marker liberalization was closer to that in the core euro zone countries; and, above all, if institutional quality in Greece had simply remained at its pre-crisis level. On the other hand, we show that, in the absence of the official fiscal bailouts, the depression would be much deeper, while the accommodative role played by the quantitative policies of the ECB has been vital to the Greek economy.
    Keywords: growth, macroeconomic policy, institutions
    JEL: O40 H60 E02
    Date: 2020
  6. By: José Carlos Coelho
    Abstract: In 2011, Portugal agreed with the Troika (European Commission, European Central Bank and International Monetary Fund) to implement an economic and financial assistance programme during the period 2011-2014. One of the objectives of the programme was to guarantee the sustainability of public accounts, by setting targets for reducing the weight of the budget balance on GDP. Between 2010 and 2013, the weight of the budget deficit on GDP decreased by six percentage points. However, in that period, there was a colossal destruction of jobs and the unemployment rate grew by five percentage points. In an Input-Output framework, we show the existence of a negative relationship between the unemployment rate and the budget deficit and we revisit the concept of neutral budget balance proposed by Lopes and Amaral (2017), and also we consider the use of alternative fiscal policies and a mix of fiscal policies. In an empirical application to the Portuguese case, in 2013, we concluded that: (i) the balance of public accounts in that year would imply a very high unemployment rate; (ii) the larger the budget balance in that year, the greater the negative impact on the budget balance in 2014; and (iii) the budget balance actually verified in 2013 had a detrimental effect on the reduction of the budget deficit in 2014.
    Keywords: unemployment, budget deficit, self-defeating austerity, Troika, Portugal
    JEL: C67 D57 E24 E62
    Date: 2020–04
  7. By: Paolo Finaldi Russo (Bank of Italy); Fabio Parlapiano (Bank of Italy); Daniele Pianeselli (Bank of Italy); Ilaria Supino (Bank of Italy)
    Abstract: Over the last decade and a half non-financial corporations’ (NFCs) listings have displayed a heterogeneous pattern across European countries. The number of listed NFCs has increased in Italy and Spain, while it has declined in Germany, France and the United Kingdom. In Italy, the increase in the number of listed firms has been driven by SMEs’ listings, leaving the stock market small by international standards. We break down the size gap of the Italian equity market (with respect to its European peers) into the share of listed companies and their relative size. We show that the lower share of listed NFCs in Italy accounts for the gap with France and the UK, while the smaller size of Italian public firms has a crucial bearing on the differences with Germany and Spain. Counterfactual exercises provide evidence that there is limited room to bridge these gaps, as the structure of the Italian economy leans towards small enterprises. Policy measures aimed at fostering SMEs’ propensity to go public may be more effective in promoting the further development of the Italian stock exchange.
    Keywords: Capital markets, stock market, IPOs, SMEs listings
    JEL: G1 G3
    Date: 2020–04
  8. By: Anastasiou, Dimitrios; Katsafados, Apostolos G.
    Abstract: We investigate whether the so-called textual sentiment has any impact on European depositors’ behavior to withdraw their deposits. After the manual collection of monthly speeches of the president of the European Central Bank (ECB hereafter) we apply textual analysis techniques following the methodology of Loughran and McDonald (2011) and we construct two alternative sentiments able to capture the perceived uncertainty. We find that high frequency of uncertainty and weak modal words in the monthly speeches of the president of the ECB leads both households and non-financial corporations to withdraw their bank deposits. We also find that these textual sentiments have greater impact on non-financial corporations. These findings suggest that regulators and policy makers could expand the already existing early-warning systems for the banking sector by taking into consideration the frequency of uncertainty and weak modal words in the ECB president’s speeches.
    Keywords: European deposit flows; bank runs; ECB President's speeches; textual analysis; textual sentiment
    JEL: D8 D80 G0 G02 G2 G20 G21
    Date: 2020–01
  9. By: Zhe Wang (Department of Economics, University of Reading)
    Abstract: This paper analyses the impact of shocks and labor market institutions on unemployment across the Euro Area (EA) from 1999 to 2013. Specifically, I apply an empirical methodology to identify the direct effects of shocks and labor market institutions on unemployment, on the one hand, and the indirect effects of labor market institutions on changing the transmission of shocks to unemployment, on the other hand. The shocks consist of: 1) total factor productivity (TFP) shocks, 2) the real long-term interest rate, 3) labor demand shocks, 4) ECB money supply shocks and 5) ECB unsystematic monetary policy shocks. The labor market institutions cover the unemployment benefit system, active labor market policies (ALMPs), employment protection laws (EPLs), the system of wage determination and the labor tax wedge. The results suggest that the real interest rate and labor demand shocks significantly affect the unemployment rate in the EA. As for labor market institutions, EPLs play a favorable role in reducing unemployment. In contrast, a higher tax wedge tends to have an adverse effect on unemployment, not only directly increasing unemployment but also indirectly amplifying the effects of shocks on unemployment.
    Keywords: Unemployment, Shocks, Labor market institutions, Interactions, Monetary policy
    JEL: E24 J08 E52 F45
  10. By: Chiara Perillo (University of Zurich, Department of Banking and Finance, Zurich, Switzerland); Stefano Battiston (University of Zurich, Department of Banking and Finance, Zurich, Switzerland)
    Abstract: The long-lasting socio-economic impact of the global financial crisis has questioned the adequacy of traditional tools in explaining periods of financial distress, as well as the adequacy of the existing policy response. In particular, the effect of complex interconnections among financial institutions on financial stability has been widely recognized. A recent debate focused on the effects of unconventional policies aimed at achieving both price and financial stability. In particular, Quantitative Easing (QE, i.e., the large-scale asset purchase programme conducted by a central bank upon the creation of new money) has been recently implemented by the European Central Bank (ECB). In this context, two questions deserve more attention in the literature. First, to what extent, by injecting liquidity, the QE may alter the bank-firm lending level and stimulate the real economy. Second, to what extent the QE may also alter the pattern of intra-financial exposures among financial actors (including banks, investment funds, insurance corporations, and pension funds) and what are the implications in terms of financial stability. Here, we address these two questions by developing a methodology to map the macro-network of financial exposures among institutional sectors across financial instruments (e.g., equity, bonds, and loans) and we illustrate our approach on recently available data (i.e., data on loans and private and public securities purchased within the QE). We then test the effect of the implementation of ECB's QE on the time evolution of the financial linkages in the macro-network of the euro area, as well as the effect on macroeconomic variables, such as output and prices.
    Date: 2020–04
  11. By: Boris Fisera (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic; Slovak Academy of Science, Stefanikova 49, 814 38, Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We evaluate the effect of exchange rate misalignments on the balance of trade and the role that global value chain participation plays in this effect for 11 new European Union member states. Using heterogeneous panel cointegration methods, we first estimate the real equilibrium exchange rate and detect episodes of currency misalignment. We find asymmetric effects of real currency misalignments: overvaluation has a negative effect, but undervaluation has no effect on the trade balance. Additionally, we find that global value chain participation weakens the effect of currency misalignments on the balance of trade. Therefore, our results suggest that globalization reduces the role of exchange rates in stimulating the domestic economy.
    Keywords: Balance of trade, exchange rates, global value chains, export sophistication, panel cointegration
    JEL: F31 F32
    Date: 2020–04
  12. By: Anja Kukuvec; Harald Oberhofer
    Abstract: This paper empirically investigates the propagation of fims’ expectations within the European Union (EU). To this end, we combine EU-wide official business survey data with world input-output data. Econometrically, we model interdependencies in economic activities via input-output-linkages and apply space-time models with common factors. The resulting evidence provides indication for the existence of substantial spillovers in expectation formation. They are transmitted both upstream and downstream the European value chain, but the latter channel matters more.
    Keywords: business expectation formation, propagation, input-output linkages, spillovers, space-time model
    JEL: C23 D84 L14
    Date: 2020
  13. By: Hauser, Luisa-Marie; Schlag, Carsten-Henning; Wolf, André
    Abstract: This paper analyses the macroeconomic implications of a future shift in the age structure of the Swiss population. It estimates the long-run effects for Swiss GDP growth and its components in an Overlapping Generations Model (OLG model). Recent population projections by the Federal Statistical Office (FSO) serve as a basis. To document the sensitivity of the results with respect to the demographic assumptions, simulations were undertaken for a range of alternative scenarios concerning fertility, migration and agespecific labor supply. Our projections over the time horizon 2018-2060 document a significant loss in terms of economic growth in both absolute and per capita terms. According to our simulations, this would primarily affect the income of the middle-aged age groups. Likewise, the process of ageing would have consequences for the composition of Swiss GDP: the share of government spending on domestic value added is simulated to increase, due to its demography-related components. A sensitivity analysis reveals that more favourable assumptions concerning future net immigration, fertility and labor market participation could mitigate, but not fully compensate these trends.
    Keywords: Ageing,OLG-models,Long-term GDP forecasts,Switzerland
    JEL: J11 C68 E37
    Date: 2020
  14. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks are not universally like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. These results lend support to a pricing bias mechanism as an important transmission channel. A comparison of results across countries suggest that demographics and factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. I develop an Overlapping Generations New Keynesian model with Deep Habits to rationalize these results.
    JEL: D84 E20 E30
    Date: 2020–04–24
  15. By: José María Serena Garralda; Serafeim Tsoukas
    Abstract: Using a cross-country sample of bank-dependent public firms we study the international spillovers of a change in banking regulation on corporate borrowing. For identification we examine how US firms' liabilities vis-à-vis banks, non-bank lenders and bond markets evolve after an increase in capital requirements implemented by the European Banking Authority (EBA) in 2011. We find that US firms experience a reduction in credit lines but not in term loans from EU banks. In addition, US firms are able to compensate for the reduction in credit lines from EU banks by securing liquidity facilities from US non-bank financial institutions, without increasing borrowing from corporate bond markets. These results suggest that diversified domestic loan markets, with both banks and non-bank financial institutions providing loans to corporations, can help overcome cuts in cross-border bank funding.
    Keywords: credit lines, term loans, bank capital requirements, firm-level data, non-bank financial intermediaries
    JEL: G21 G32 F32 F34
    Date: 2020–04
  16. By: Jean-Guillaume Sahuc; Christian Pfister
    Abstract: This paper takes stock of the literature on unconventional monetary policies, from their implementation to their effects on the economy. In particular, we discuss in detail the two main measures implemented in most developed economies, namely forward guidance and large-scale asset purchases. Overall, there is near consensus that these measures have been useful, although there are a few dissenting views. Because unconventional monetary policies have left their mark on economies and on the balance sheets of central banks, we offer insights into their legacy and ask whether they have led to a change in “the rules of the game” for setting interest rates and choosing the size and composition of central banks’ balance sheets. Finally, we discuss whether to modify the objectives and the instruments of monetary policy in the future, in comparison with the pre-crisis situation.
    Keywords: Unconventional monetary policies.
    JEL: E52 E58
    Date: 2020
  17. By: Giorgio Albareto (Bank of Italy); Andrea Cardillo (Bank of Italy); Andrea Hamaui (Harvard University); Giuseppe Marinelli (Bank of Italy)
    Abstract: The paper investigates how the characteristics of the distribution network and the affiliation to a banking group affect mutual funds performance exploiting a unique dataset with extremely detailed information on funds’ portfolios and bank-issuer relationships for the period 2006-2017. We find that bank-affiliated mutual funds underperform independent ones. The structure of the distribution channels is a key-factor affecting mutual funds' performance: when bank platforms become by far the prevalent channel for the distribution of funds’ shares, asset management companies are captured by banks. As for bank affiliation, results show a positive bias of bank-controlled mutual funds towards securities issued by their own banking group clients (of the lending and investment banking divisions) and by institutions belonging to their own banking group; this last bias is exacerbated for mutual funds belonging to undercapitalized banking groups. The structure of the distribution channels explains two thirds of bank-affiliated mutual funds underperformance, whereas investment biases explain one fourth of the observed differential in returns with independent mutual funds.
    Keywords: mutual funds, mutual funds performance, distribution networks, conflict of interest
    JEL: G23 G21 G11 G32
    Date: 2020–04

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