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on European Economics |
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Issue of 2020‒05‒25
eleven papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Mario Alloza (Banco de España); Marien Ferdinandusse (European Central Bank); Pascal Jacquinot (European Central Bank); Katja Schmidt (Banque de France) |
| 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: | fiscal spillovers, fiscal policy, monetary policy, VAR, DSGE |
| JEL: | F42 F45 H50 E62 E63 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2012&r=all |
| By: | Mahdi Ghodsi (The Vienna Institute for International Economic Studies, wiiw); Hüseyin Karamelikli |
| Abstract: | Economic sanctions are intensively used by international institutions to enforce political objectives. Since 2006 the EU has been implementing general sanctions against the whole economy of Iran, affecting their trade relations. Since 2007, and following the imposition of sanctions by the UN Security Council, the EU has also implemented smart sanctions targeting Iranian entities and natural persons associated with its military activities. In a non-linear autoregressive distributed lag (NARDL), this paper investigates the impact of general and targeted EU sanctions against Iran on quarterly bilateral trade values between the 19 members of the euro area (EA19) and Iran between the first quarter of 1999 and the fourth quarter of 2018. The results indicate that general sanctions have strongly hampered trade flows between the two trading partners. The impact of general sanctions on the total imports of the EA19 from Iran is more than four times stronger than on the total exports of the EA19 to Iran. Moreover, the EU’s general sanctions have hampered trade in almost all sectors, except for the primary sectors. Furthermore, our study finds that the impact of smart sanctions targeting Iranian entities and natural persons is much smaller than the impact of general sanctions on total trade values and the trade values of many sectors. Smart sanctions affect the exports of most sectors from the EA19 to Iran, while they are statistically insignificant for the imports of many sectors from Iran. Thus, this paper provides evidence on the motivations behind smart sanctions, which target specific individuals and entities rather than the whole economy, unlike general sanctions, which have a negative impact on ordinary people. |
| Keywords: | Smart sanctions, Iran, trade values, time series analysis, NARDL |
| JEL: | F13 F14 F50 F51 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:181&r=all |
| By: | Alfredo García-Hiernaux (DANAE AND ICAE); María T. González-Pérez (Banco de España); David E. Guerrero (CUNEF) |
| Abstract: | This article provides a methodology to test absolute and relative price convergence (in mean and variance) based on a model of relative prices that includes a transition path, and offers a way to measure the speed of price convergence across countries. By applying this test to the European Monetary Union (EMU) price indices from 2001 to 2011, we find empirical evidence of different price level patterns and the lack of price level convergence in the long run for most countries. In terms of the price gap between countries, only when we compare the German with French and Italian prices, we do get zero-gap (absolute) price level convergence. A few other countries report relative price level convergence. These results underscore the existence of a “convergence cost” that EMU countries with lower price levels paid and that does not tend toward zero in the long-term in the absence of convergence. This finding might be of particular interest to European monetary policymakers as it implies that implemented monetary policy does not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute price level convergence is advised to understand the monetary policy efficiency in the long run. |
| Keywords: | price level convergence, mean convergence, variance convergence, inflation, monetary union, monetary policy |
| JEL: | C22 C32 N70 E3 E4 E5 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2010&r=all |
| By: | Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto |
| Abstract: | We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED's put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone. |
| Keywords: | Unconventional Monetary policy,Quantitative easing,Mundellian trilemma,Comovements,Sovereign credit risk |
| JEL: | E58 G12 G15 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:276&r=all |
| By: | Marta Fana (European Commission - JRC); Songul Tolan (European Commission - JRC); Sergio Torrejon Perez (European Commission - JRC); Maria Cesira Urzi Brancati (European Commission - JRC); Enrique Fernandez Macias (European Commission - JRC) |
| Abstract: | This paper assesses the potential impact of the early 2020 COVID confinement measures on EU labour markets, on the basis of an analysis of the restrictions on economic activity imposed in three EU Member States (Italy, Spain and Germany). Following the legislative measures adopted, we classify all economic sectors into different categories according to the likely impact of the COVID crisis, and compare the share of employment that is likely to be strongly affected in each country. Once this is done, we apply these categories of sectors to recent data on EU employment and estimate the groups of workers that would be more or less affected by the economic lockdown measures. Finally, we use all this information to speculate about possible mid-term developments and broader socio-economic implications of the COVID crisis in Europe. |
| Keywords: | Impact of Covid19, COVID lockdown measures, COVID confinement measures, employment impact of COVID, Covid-19 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc120578&r=all |
| By: | Florian Huber; Michael Pfarrhofer |
| Abstract: | Successful forecasting models strike a balance between parsimony and flexibility. This is often achieved by employing suitable shrinkage priors that penalize model complexity but also reward model fit. In this note, we modify the stochastic volatility in mean (SVM) model proposed in Chan (2017) by introducing state-of-the-art shrinkage techniques that allow for time-variation in the degree of shrinkage. Using a real-time inflation forecast exercise, we show that employing more flexible prior distributions on several key parameters slightly improves forecast performance for the United States (US), the United Kingdom (UK) and the Euro Area (EA). Comparing in-sample results reveals that our proposed model yields qualitatively similar insights to the original version of the model. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.06851&r=all |
| By: | Antoine Berthou; John Jong-Hyun Chung; Kalina Manova; Charlotte Sandoz-Dit-Bragard |
| Abstract: | We examine the gains from globalization in the presence of firm heterogeneity and potential resource misallocation. We show theoretically that without distortions, bilateral and export liberalizations increase aggregate welfare and productivity, while import liberalization has ambiguous effects. Resource misallocation can either amplify, dampen or reverse the gains from trade. Using model-consistent measures and unique new data on 14 European countries and 20 industries in 1998-2011, we empirically establish that exogenous shocks to export demand and import competition both generate large aggregate productivity gains. Guided by theory, we provide evidence consistent with these effects operating through reallocations across firms in the presence of distortions. (i) Both export and import expansion increase average firm productivity, but the former also shifts activity towards more productive firms, while the latter acts in reverse. (ii) Both export and import exposure raise the productivity threshold for survival, but this cut-off is not a sufficient statistic for aggregate productivity. (iii) Efficient institutions, factor and product markets amplify the gains from import competition but dampen those from export access. |
| Keywords: | : International Trade, Productivity, Allocative Efficiency. |
| JEL: | F10 F14 F43 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:749&r=all |
| By: | Christopher F Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Caterina Forti Grazzini (European Central Bank; FU Berlin) |
| Abstract: | This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector. |
| Keywords: | Institutional Diversity; Shannon Index; Gini-Simpson Index; Bank Stability; Financial Crisis; Bank Competition |
| JEL: | G01 G20 G21 G28 |
| Date: | 2020–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:1008&r=all |
| By: | Vincenzo Galasso |
| Abstract: | Regions seeking more autonomy aim at making less (or no) fiscal transfers to central governments and at reaching more (or total) control on regional spending. However, decentralization may lead to joint central-regional responsibility that increases regulatory uncertainty regarding the bureaucratic and fiscal burdens on firms. Moreover, quests for independence create political uncertainty. To evaluate economic costs and benefits for firms from decentralization or independence, we analyze the Catalan-Spanish negotiation leading to the 2006 Catalan Statute and the more recent quest for independence. We use an event approach methodology to estimate the immediate stock market reaction to new events. Our results suggest that the stock market had a conservative reaction both to more decentralization and to independence. The approval of the Catalan Statute was associated with negative returns for Catalan firms, particularly in the tradable sector. These firms later benefitted from the partial reversal imposed by the Spanish Constitutional Court ruling. The large increase in the political uncertainty that emerged at the referendum day had a strong negative effect on all Catalan firms and on Spanish firms in the tradable sector. This uncertainty was partially reduced, when the Spanish Senate rejected the declaration of Catalan independence. Markets reacted positively, with Catalan, but also Spanish, firms in all sectors posting large gains that largely compensated the previous losses. |
| Keywords: | independence, decentralization, event approach |
| JEL: | H77 G14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8254&r=all |
| By: | Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Paul E. Soto |
| Abstract: | Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB's asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase). |
| Keywords: | Asset quality review; stress tests; supervision; risk-masking; costs of safe assets |
| JEL: | E58 G21 G28 H63 L51 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1721&r=all |
| By: | Laine, Olli-Matti; Lindblad, Annika |
| Abstract: | We analyse the performance of financial market variables in nowcasting Finnish quarterly GDP growth. Especially, we assess if prediction accuracy is affected by the sampling frequency of the financial variables. Therefore, we apply MIDAS models that allow us to forecast quarterly GDP growth using monthly or daily data without temporal aggregation in a parsimonious way. Our results show that financial market data nowcasts Finnish GDP growth relatively well. When it comes to individual variables, ratios like average price-to-earnings, average price-to-book or average dividend yield track GDP growth well. Our results suggest that the sampling frequency of financial market variables is not crucial: the forecasting accuracy of daily, monthly and quarterly data is similar. |
| Keywords: | MIDAS,Nowcasting,Financial markets,GDP |
| JEL: | E44 G00 E37 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:42020&r=all |