nep-eec New Economics Papers
on European Economics
Issue of 2020‒07‒20
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
  2. The odd fiscal ‘implicit bargain’ in the Eurozone. A continental view of sovereignty: List, Chartalism, and Keynes’ international economics By Ignacio Ramirez Cisneros
  3. Italy in the Eurozone By Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
  4. 25 Years of Austria's EU Membership. Quantifying the Economic Benefits With a DSGE Model By Fritz Breuss
  5. Business cycle accounting for the German fiscal stimulus program during the Great Recession By Daniel Fehrle; Johannes Huber
  6. Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs By Mariarosaria Comunale
  7. Does a Big Bazooka Matter? Quantitative Easing Policies and Exchange Rates By Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
  8. How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  9. Reading between the lines - Using text analysis to estimate the loss function of the ECB By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
  10. Relevance of Sovereign Bond Valuations Topic in the Speeches of ECB Officials By Linas Jurksas; Vitalijus Klincevicius
  11. “Measuring and assessing economic uncertainty” By Oscar Claveria
  12. The Effect of Demographic Change on the Swiss Labor Market: The Role of Participation Rates By Buchmann, Manuel

  1. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
    Abstract: Despite a formal ‘no-bailout clause’, we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road’.
    JEL: F34 F45
    Date: 2020–06
  2. By: Ignacio Ramirez Cisneros (University of Missouri-Kansas City (US))
    Abstract: At present, the European customs and currency union finds itself in a transitional period. Without a path forward toward greater political unity, it has prematurely bound constituents by ‘hard law’ fiscal limitations (the Maastricht criteria, Stability and Growth pact, Fiscal Compact) not dissimilar to those applying to provinces, states, or Laender. In other words, it is caught in an odd 'implicit bargain’ (Goodhart) where members are expected to abide by de jure fiscal constraints with no central authority having the fiscal capabilities for stabilization, redistribution, and state-building (Arrighi) expenditures --all of which are indispensable in modern credit economies. The present paper makes use of European economic traditions reliant on statecraft to revisit the region's integration under the leitmotiv of economic sovereignty as a continental project. Specifically, we look at the work of List, Keynes, and the Chartalists. The work of F. List sets European economic unification in its historic place as a strategy founded in large part on exploiting economies of scale (demand and supply-side) by political and economic aggregation of smaller non-self sustaining economies into one market. This proposal for a new Continental System sought to lay the foundation for ‘catching-up’ or emulation of world economic leaders. Keynes’s international economics serves as the most useful orienting blueprint to begin to address the particularity of economic unification among sovereigns absent political unity. Chartalist insights into the political nature of central banks are of great value, and can help frame the European Central Bank's often clumsy attempts to hold together the Union within a broader scope. Despite its differential treatment of members thus far, the ECB could become a centerpiece institution in the consolidation of Europe as a self-sustaining pole of international effective demand. The overriding thematic principle encompassing the different authors (and traditions) discussed is that of European economic sovereignty in a region continuously struggling to balance political independence with economic co-dependence, and possibly unity.
    Keywords: sovereignty, eurozone, sovereign-constituent fiscal implicit bargain, continental political economy, international macroeconomic viability
    JEL: B15 B52 E12 F15 F45
    Date: 2020–07
  3. By: Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
    Abstract: Using a DSGE model with nominal wage rigidity, we investigate two scenarios for the Italian economy. The first considers sustained policy commitment to reform. The results indicate the possibility of `growing out of bad initial conditions', if fiscal consolidation is combined with a program for bank recovery and for competitiveness and growth. The second scenario involves a strong asymmetric recession. It is likely to be very severe under the restrictions of the currency union. A benign exit from the Eurozone with stable investor expectations could substantially dampen the short-run impact. Stabilization is achieved by monetary expansion, combined with exchange rate depreciation. However, investor panic may lead to escalation. Capital market reactions would offset the benefits of monetary autonomy and much delay the recovery.
    Keywords: Monopoly, price setting, spatial interaction, natural experiment, yardstick competition
    JEL: L12 L43
    Date: 2020–07
  4. By: Fritz Breuss
    Abstract: Austria's EU accession 25 years ago, alongside Finland and Sweden, was preceded by an extended period of convergence toward the EU: via the free trade agreement concluded with the EC in 1973, and the participation in the European Economic Area (EEA) in 1994. Although the COVID-19 crisis in 2020 seems to overshadow the overall positive balance of 25 years of EU membership, on average the real GDP growth dividend amounted to 0.8 percentage points per year since 1995. To check the robustness of this result, obtained with an integration macro model, a DSGE model for Austria is used here. Usually other methods are applied to estimate integration effects: trade gravity models, CGE models, macro models. Following in't Veld's (2019) approach with a DSGE model for the EU, we adapt an earlier version of the two-country DSGE model for Austria and the Euro area (Breuss and Rabitsch, 2009) to evaluate the benefits of Austria's EU membership. It turns out that grosso modo the macro results can be confirmed with the DSGE model.
    Keywords: European Integration; Model simulations; country studies
    Date: 2020–06–26
  5. By: Daniel Fehrle (University of Augsburg, Department of Economics); Johannes Huber (University of Augsburg, Department of Economics)
    Abstract: We take the neoclassical perspective and apply the business cycle accounting method as proposed by Chari, Kehoe, and McGrattan (2007, Econometrica) for the Great Recession and the associated stimulus program in Germany 2008-2009. We include wedges to the variables government consumption, durables, investment, labor, net exports, and efficiency. The results suggest: The crisis was mainly driven by the efficiency wedge, followed by the net exports and the investment wedge. The government consumption wedge and in particular the durables wedge acted counter-cyclical. We attribute the latter to an internationally incomparably large cash for clunkers program and conclude that this subsidy on durable goods was more effective than pure government consumption. We introduce a strategy for likelihood maximization, which reliably and quickly locates the maximum; enables a detailed evaluation of the likelihood function and allows large robustness checks.
    Keywords: fiscal stimulus, great Recession, business cycle accounting, maximum-likelihood
    JEL: C32 E20 E32 H12 H31
    Date: 2020–06
  6. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.
    Keywords: euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy
    JEL: E31 F31 F45
    Date: 2020–03–26
  7. By: Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
    Abstract: We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks' balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. The typical ECB or Federal Reserve expansionary QE announcement in our sample resulted in an increase in the relative balance sheet of about 20% and, in turn, in a persistent exchange rate depreciation of around 7%. Regarding transmission channels, we find that a relative QE shock that expands the ECB's balance sheet relative to that of the Federal Reserve depreciates the euro against the US dollar by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in "residual" deviations from interest parity. Changes in the expectations about the future monetary policy stance, reflecting the "signalling" channel of QE, also contribute to the exchange rate response to QE shocks.
    Keywords: CIP Deviations; QE Dynamic Effects; Signalling Channel of QE
    JEL: F41
    Date: 2020–01
  8. By: Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
    Date: 2020–06–05
  9. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
    Abstract: We measure the tone (sentiment) of the ECB’s Governing Council regarding economic outlook at the time of each monetary policy meeting and use this information together with the Eurosystem/ECB staff macroeconomic projections to directly estimate the Governing Council’s loss function. Our results support earlier, more indirect findings, based on reaction function estimations, that the ECB has been either more averse to inflation above 2% ceiling or that the de facto inflation aim has been considerably below 2%. Our results suggest further that an inflation aim of 2% combined with asymmetry is a plausible specification of the ECB’s preferences.
    JEL: E31 E52 E58
    Date: 2020–07–06
  10. By: Linas Jurksas (Bank of Lithuania); Vitalijus Klincevicius (Strata)
    Abstract: The aim of this paper is to assess how relevant is the topic of sovereign bond valuations in official ECB Executive Board member speeches and, in particular, under what circumstances do ECB officials begin communicating the driving factors of sovereign bond pricing. For this purpose, we downloaded over 2000 public ECB Executive Board member speeches and applied various text mining techniques. The visual analysis revealed that the importance of the topic of sovereign bond pricing and related risk factors in ECB officials’ speeches has greatly fluctuated over time. The main structural break points were linked to the financial market turbulences, but this topic, possibly due to the introduction of sovereign bond purchases, remained relatively popular even after stress episodes. The linkages between the publicly communicated terms of sovereign bond pricing and related risk factors were rather complex and change in respect to the market situation. Meanwhile, the sentiment balance of the credit risk factor was usually on the negative side, while the ones of other terms were much more neutral.
    Keywords: ECB Executive Board, speeches, sovereign bonds, risk factors, correspondence analysis, sentiment analysis
    JEL: C80 E43 E58 G12
    Date: 2020–06–01
  11. By: Oscar Claveria (AQR-IREA, University of Barcelona)
    Abstract: TThis paper evaluates the dynamic response of economic activity to shocks in agents’ perception of uncertainty. The study focuses on the comparison between manufacturers 'and consumers' perception of economic uncertainty. Since uncertainty is not directly observable, we approximate it using the geometric discrepancy indicator of Claveria et al. (2019). This approach allows us quantifying the proportion of disagreement in business and consumer expectations of eleven European countries and the Euro Area. First, we compute three independent indices of discrepancy corresponding to three dimensions of uncertainty (economic, inflation and employment) and we average them to obtain aggregate disagreement measures for businesses and for consumers. Next, we use a bivariate Bayesian vector autoregressive framework to estimate the impulse response functions to innovations in disagreement in every country. We find that the effect on economic activity of shocks to the perception of uncertainty differ markedly between manufacturers and consumers. On the one hand, shocks to consumer discrepancy tend to be of greater magnitude and duration than those to manufacturer discrepancy. On the other hand, innovations in disagreement between the two collectives have an opposite effect on economic activity: shocks to manufacturer discrepancy lead to a decrease in economic activity, as opposed to shocks to consumer discrepancy. This finding is of particular relevance to researchers when using cross-sectional dispersion of surveybased expectations, since the effect on economic growth of shocks to disagreement depend on the type of agent.
    Keywords: Economic uncertainty, Production, Inflation, Employment, Expectations, Disagreement JEL classification: C32, E23, E24, E31.
    Date: 2020–07
  12. By: Buchmann, Manuel (University of Basel)
    Abstract: The ongoing demographic change is expected to negatively affect the effective labor supply of various developed countries. In order to counteract these developments, many suggested policy measures target the participation rate of women and old workers. In this paper, I develop a multi-sectoral CGE-OLG model where workers of different ages and skills are assumed to be imperfect substitutes and calibrate it to the Swiss economy. I use this model to evaluate the effects of the demographic change on the Swiss labor market and the potential of reforms targeting different participation rates. I find that a yearly decrease of old workers' preference towards leisure by 2% between 2022 and 2030 yields macroeconomic results that are comparable to an increase in the statutory retirement age by 2 years. While the increase of the retirement age succeeds in increasing net income by more than both participation rate increases, it also leads to an increase in wage levels and thereby labor shortages. This result highlights the importance of reducing scarcity on the labor markets for macroeconomic performance and shows the potential of reforms targeting labor market participation.
    Keywords: overlapping generations, demographic change, participation rates, switzerland
    JEL: D58 E24 E66 J11 J21 J26
    Date: 2020–06–22

This nep-eec issue is ©2020 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.