nep-eec New Economics Papers
on European Economics
Issue of 2020‒06‒22
thirteen 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 Pablo Burriel; Panagiotis Chronis; Maximilian Freier; Sebastian Hauptmeier; Lukas Reiss; Dan Stegarescu; Stefan Van Parys
  2. Trade models in the European Union By Gräbner, Claudius; Tamesberger, Dennis; Heimberger, Philipp; Kapelari, Timo; Kapeller, Jakob
  3. Exchange rate pass-through in the euro area and EU countries By Eva Ortega; Chiara Osbat
  4. Demographics and the natural interest rate in the euro area By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  5. Is there a Harrod-Balassa-Samuelson effect? New panel data evidence from 28 European countries By Lenarčič, Črt; Masten, Igor
  6. Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending By Matthieu Bussière; Robert Hills; Simon Lloyd; Baptiste Meunier; Justine Pedrono; Dennis Reinhardt; Rhiannon Sowerbutts
  7. Unconventional Monetary Policy and Wealth Inequalities in Great Britain By Evgenidis, Anastasios; Fasianos, Apostolos
  8. Net foreign assets dynamics: the persistence and sources of shocks to net foreign assets in 12 EU countries By Ong, Kian
  9. Public Opinion on Central Banks when Economic Policy is Uncertain By Klodiana Istrefi; Anamaria Piloiu
  10. Diagonal Cumulation and Sourcing Decisions By Pamela Bombarda; Elisa Gamberoni
  11. External imbalances and recoveries By Mariam Camarero; María Dolores Gadea-Rivas; Ana Gómez-Loscos; Cecilio Tamarit
  12. The COVID-19 Pandemic and Sovereign Bond Risk By Alin Marius Andries; Steven Ongena; Nicu Sprincean
  13. Unconventional Monetary Policies: A Stock-Taking Exercise By Christian Pfister; Jean-Guillaume Sahuc

  1. By: Pablo Burriel (Banco de España); Panagiotis Chronis (Bank of Greece); Maximilian Freier (European Central Bank); Sebastian Hauptmeier (European Central Bank); Lukas Reiss (Öesterreichische Nationalbank); Dan Stegarescu (Deutsche Bundesbank); Stefan Van Parys (Nationale Bank van België/Banque Nationale de Belgique)
    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.
    Keywords: euro area fiscal capacity, fiscal risk-sharing, fiscal federalism
    JEL: E62 H11 H77
    Date: 2020–06
  2. By: Gräbner, Claudius; Tamesberger, Dennis; Heimberger, Philipp; Kapelari, Timo; Kapeller, Jakob
    Abstract: By studying the factors underlying differences in trade performance across European economies, this paper derives six different 'trade models' for 22 EU-countries and explores their developmental and distributional dynamics. We first introduce a typology of trade models by clustering countries based on four key dimensions of trade performance: endowments, technological specialization, labour market characteristics and regulatory requirements. The resulting clusters comprise countries that base their export success on similar trade models. Our results indicate the existence of six different trade models: the 'primary goods model' (Latvia, Estonia), the "finance model" (Luxembourg), the "flexible labour market model" (UK), the "periphery model" (Greece, Portugal, Spain, Italy, France), the 'industrial workbench model' (Slovenia, Slovakia, Poland, Hungary, Czech Republic), and the 'high-tech model' (Sweden, Denmark, Netherlands, Belgium, Ireland, Finland, Germany and Austria). Subsequently, we comparatively analyse the economic development and trends in inequality across these trade models. We observe a shrinking wage share and increasing personal income inequality in most of the trade models. The "high-tech model" is an exceptional case, being characterised by a relatively stable economic development and an institutional setting that managed to counteract rising inequality.
    Keywords: Trade policy,cluster analysis,European Union,growth models,trade models
    JEL: F10 F16 F43 J3 J5 K2
    Date: 2020
  3. By: Eva Ortega (Banco de España); Chiara Osbat (European Central Bank)
    Abstract: Aggregate exchange rate pass-through (ERPT) to import and consumer prices in the EU is currently lower than it was in the 1990s and is non-linear. Low estimated aggregate ERPT to consumer prices does not at all mean that exchange rate movements do not have an impact on inflation, as aggregate rules of thumb mask substantial heterogeneities across countries, industries and time periods owing to structural, cyclical and policy factors. Looking also at new micro evidence, four key structural characteristics explain ERPT across industries or sectors: (i) import content of consumption, (ii) share of imports invoiced in own currency or in a third dominant currency, (iii) integration of a country and its trading partners in global value chains, and (iv) market power. In the existing literature there is also a robust evidence across models showing that each shock which causes the exchange rate to move has a different price response, meaning that the combination of shocks that lies behind the cycle at any point in time has an impact on ERPT. Finally, monetary policy itself affects ERPT. Credible and aggressive monetary policy reduces the observed ex post ERPT, as agents expect monetary policy to counteract deviations of inflation from target, including those relating to exchange rate fluctuations. Moreover, under the effective lower bound, credible non-standard monetary policy actions result in greater ERPT to consumer prices. This paper recommends moving away from rule-of-thumb estimates and instead using structural models with sufficient feedback loops, taking into account the role of expectations and monetary policy reactions, to assess the impact of exchange rate changes when forecasting inflation.
    Keywords: exchange rates, import prices, consumer prices, inflation, pass-through, euro area, monetary policy
    JEL: C50 E31 E52 F31 F41
    Date: 2020–06
  4. By: Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
    Abstract: We investigate the impact of demographics on the natural rate of interest (NRI) in the euro area, with a particular focus on the role played by economic openness, migrations and pension system design. To this end, we construct a life-cycle model and calibrate it to match the life-cycle profiles from HFCS data. We show that population aging contributes significantly to the decline in the NRI, explaining about two-thirds of its secular decline between 1985 and 2030. Openness to international capital flows has not been important in driving the EA real interest rate so far, but will become a significant factor preventing its further decline in the coming decades, when aging in Europe accelerates relative to the rest of the world. Of two possible pension reforms, only an increase in the retirement age can revert the downward trend on the equilibrium interest rate while a fall in the replacement rate would make its fall even deeper. The demographic pressure on the Eurozone NRI can be alleviated by increased immigration, but only to a small extent and with a substantial lag.
    Keywords: population aging, natural interest rate, life-cycle models, pension systems, migrations
    JEL: E31 E52 J11
    Date: 2020–06
  5. By: Lenarčič, Črt; Masten, Igor
    Abstract: Harrod-Balassa-Samuelson phenomenon describes the relationship between productivity and price inflation within different sectors of a particular economy, where the sectoral productivity differential stands as one of the possible drivers of the (structural) price inflation. The Harrod-Balassa-Samuelson effect could therefore represent an additional inflation source of the economy. From an economic policy perspective it is important to address this issue, in order to contain inflation sufficiently low with adequate policy measures. Using a dynamic panel data model the Harrod-Balassa-Samuelson hypothesis is tested and confirmed by applying a strict distinction between the sectoral price inflation and the average labour productivity growth data from the 1990-2017 period for 28 European countries. Additionally, we provide inflation simulations based on the results that confirm the existence of the Harrod-Balassa-Samuelson effect.
    Keywords: Harrod-Balassa-Samuelson effect, productivity, inflation, dynamic panel data model
    JEL: C12 C23 E31
    Date: 2020–05–12
  6. By: Matthieu Bussière; Robert Hills; Simon Lloyd; Baptiste Meunier; Justine Pedrono; Dennis Reinhardt; Rhiannon Sowerbutts
    Abstract: We examine how euro area (EA) monetary policy and recipient-country prudential policy interact to influence cross-border lending of French banks. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities, specifically by bank size and location of the affiliate (French HQ vs. affiliates based in the UK). We find that the response of lending from French HQ to EA monetary policy is less sensitive to recipient-country prudential policy for systemic banks (GSIBs) than for non-GSIBs’. In contrast, the response of lending from GSIBs’ affiliates in the UK is sensitive to recipient-country prudential policy. French GSIBs’ crossborder lending from French HQ responds differently than lending from international financial centres. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner dampened by global prudential policy setting. These findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK depending on global prudential policies and, from there, lend to third-party countries according to local prudential policies. Finally, we have similar findings for all EA-owned banks UK affiliates, suggesting a broader relevance for the London Bridge.
    Keywords: : Monetary Policy, Prudential Policy, Policy Interactions, Spillovers, Financial Centre.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2020
  7. By: Evgenidis, Anastasios; Fasianos, Apostolos
    Abstract: This paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched, as the policy rate reached the zero-lower bound. Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant and lingering effects on wealth inequality: the shock raises wealth inequality across households, as measured by their Gini coefficients, percentile shares, and other standard inequality indicators. Additionally, we explore the effects of different transmission channels simultaneously. We find that the portfolio rebalancing channel and house price effects widen the wealth gap, outweighing the counterbalancing impact of the savings redistribution and inflation channels. The findings of our analysis help to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.
    Keywords: Household portfolios; monetary policy; Quantitative easing; survey data; VAR; Wealth Inequality
    JEL: D31 E21 E52 H31
    Date: 2020–04
  8. By: Ong, Kian
    Abstract: The net foreign assets diverge since the early 2000s among the European Union (EU) countries: is this sustainable and what causes the divergence? This paper measures the persistence and the sources of shocks to the net foreign assets of twelve EU countries between 1972 and 2015. There is evidence of external adjustment to changes in external wealth but countries with the highest persistence of shocks see their net foreign assets diverging. The expansion of gross flows leads to this divergence of net foreign assets within the eurozone, implying whilst financial integration diversifies risk, it may lead to external imbalances.
    Keywords: net foreign assets, financial integration, persistence
    JEL: F31 F32
    Date: 2020–05–25
  9. By: Klodiana Istrefi; Anamaria Piloiu
    Abstract: This paper investigates whether uncertainty about economic policy plays a role in shaping the credibility and reputation of the central bank in the eyes of the public. In particular, we look at the effect of policy uncertainty for the dynamics of citizens’ opinion, being trust, satisfaction or confidence, in the European Central Bank, the Bank of England and the Bank of Japan. Estimating Bayesian VARs for the period 1999-2014, we find that shocks to economic policy uncertainty induce economic contractions and relatively sharp deterioration in trust or satisfaction measures, which in general take longer than economic growth to rebuild.
    Keywords: Policy Uncertainty; Central Banks; Public Opinion; Structural VAR.
    JEL: E02 E31 E58 E63 P16
    Date: 2020
  10. By: Pamela Bombarda; Elisa Gamberoni (Université de Cergy-Pontoise, THEMA)
    Abstract: Free trade agreements (FTAs) are characterized by rules of origin (RoO) and cumula- tion. These rules define which intermediate goods allow a final product to qualify for preferential access. Recent literature shows that RoO led to a reduction in imports of intermediate goods from third countries relative to partners. We consider the impact of the Pan-European Cumulation System (PECS), which provided the possibility of cumulating stages of production across European Union's FTA peripheral partners. We find that PECS reshaped regional supply chains by increasing imports of inter- mediates among these peripheral countries relative to both the European Union (EU) and third countries. We also find that PECS reinforced their value chain links with third countries relative to the EU, contributing to multilateralize regionalism.
    Keywords: Intermediate Trade, rules of origin, diagonal cumulation, PECS, input-output tables.
    JEL: F12 F13 F14 F15
    Date: 2020
  11. By: Mariam Camarero (University Jaume I and INTECO); María Dolores Gadea-Rivas (University of Zaragoza); Ana Gómez-Loscos (Banco de España); Cecilio Tamarit (University of Valencia and INTECO)
    Abstract: A decade after the beginning of the Great Recession, flow external imbalances, measured by the current account (CA) have narrowed markedly. However, stock or net foreign assets (NFA) imbalances have kept increasing and have created challenges for future macroeconomic and financial stability. To date, early warning systems (scoreboards) have focused more on flow than on the stock variables. To approach this problem, in this paper we analyze expansions using two complementary sets of indicators proposed by Harding and Pagan (2002) and Gadea et al. (2017). After controlling for a large set of explanatory variables, we find that the effect of CA imbalances is limited, except when the measures selected take into account past CA developments or some degree of persistence. In contrast, the evolution of NFA seems to be much more explanatory of the time it takes to regain the level of output previous to the recession, as well as the amplitude and the cumulation of the recoveries. Therefore, we conclude that future macro-prudential policies should pay more attention to stock variables to measure external imbalances due to their effects on the characteristics of recoveries.
    Keywords: business cycles, recoveries, NFA, external imbalances, current account
    JEL: F21 R12 C23
    Date: 2020–05
  12. By: Alin Marius Andries (Alexandru Ioan Cuza University - Faculty of Economics and Business Administration); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: Governments around the world are tackling the COVID-19 pandemic with a mix of public health, fiscal, macroprudential, monetary, or market-based policies. We assess the impact of the pandemic in Europe on sovereign CDS spreads using an event study methodology. We find that a higher number of cases and deaths and public health containment responses significantly increase the uncertainty among investors in European government bonds. Other governmental policies magnify the effect in the short run as supply chains are disrupted.
    Date: 2020–05
  13. By: Christian Pfister; Jean-Guillaume Sahuc
    Abstract: This paper takes stock of the literature on the 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

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