nep-eec New Economics Papers
on European Economics
Issue of 2020‒08‒10
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Covid 19: a new challenge for the EMU By Anne-Laure Delatte; Alexis Guillaume
  2. Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union By Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
  3. Bank capital and the European recovery from the COVID-19 crisis By Schularick, Moritz; Steffen, Sascha; Tröger, Tobias
  4. Virtually everywhere? Digitalisation and the euro area and EU economies By Anderton, Robert; Jarvis, Valerie; Labhard, Vincent; Morgan, Julian; Petroulakis, Filippos; Vivian, Lara
  5. Economic consequences of high public debt: evidence from three large scale DSGE models By Burriel, Pablo; Checherita-Westphal, Cristina; Jacquinot, Pascal; Stähler, Nikolai; Schön, Matthias
  6. Macroeconomic stabilisation properties of a euro area unemployment insurance scheme By Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
  7. Monetary policy transmission over the leverage cycle: evidence for the euro area By Rünstler, Gerhard; Bräuer, Leonie
  8. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework between the first quarter of 2018 and the fourth quarter of 2019 By Sylvestre, Julie; Coutinho, Cristina
  9. Banks and Sovereigns: Did adversity bring them closer? By T. Flavin; M.Dongue; L. Sheenan
  10. Decoupling of Labour Productivity Growth from Median Wage Growth in Central and Eastern Europe By Joris M. Schröder
  11. A vote for Europe? The 2019 EP elections from the voters' perspective By Grande, Edgar; Vidal, Guillem
  12. How much does aggregate demand travel across the Atlantic? By Van Robays, Ine; Stracca, Livio
  13. Investment Home Bias in the European Union By António Martins

  1. By: Anne-Laure Delatte; Alexis Guillaume
    Abstract: Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries’ resilience to the COVID shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) coordination by the European Council also helped to reduce the spreads but the effect was partly offset by loan-based financial assistance programs
    Keywords: Sovereign Risk;European Monetary Union;Covid;Public Policy
    JEL: F30 F45 H63
    Date: 2020–07
  2. By: Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
    Abstract: The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.
    Keywords: unconventional monetary policy,quantitative easing (QE),monetary policytransmission,excess liquidity,credit lending,heterogeneous monetary union,New Keynesianmodel
    JEL: E51 E52 E58 F41 F45
    Date: 2020
  3. By: Schularick, Moritz; Steffen, Sascha; Tröger, Tobias
    Abstract: Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.
    Keywords: bank capital,financial stablity,COVID-19
    Date: 2020
  4. By: Anderton, Robert; Jarvis, Valerie; Labhard, Vincent; Morgan, Julian; Petroulakis, Filippos; Vivian, Lara
    Abstract: Digitalisation can be viewed as a major supply/technology shock affecting macroeconomic aggregates that are important for monetary policy, such as output, productivity, investment, employment and prices. This paper takes stock of developments in the digital economy and their possible impacts across the euro area and European Union (EU) economies. It also compares how these economies fare relative to other major economies such as that of the United States. The paper concludes that: (i) there is significant country heterogeneity across the EU in terms of the adoption of digital technologies, and most EU countries are falling behind competitors, particularly the United States; (ii) digitalisation is affecting the economy through a number of channels, including productivity, employment, competition and prices; (iii) digitalisation raises productivity and lowers prices, similarly to other supply/technology shocks; (iv) this has implications for monetary policy and its transmission; and (v) structural and other policies may need to be adapted for the euro area and EU countries to fully reap the potential gains from digitalisation, while maintaining inclusiveness. JEL Classification: E22, E24, E31, E32, O33, O52
    Keywords: digital technology, euro area and EU economies, human/intangible capital, inflation, labour market, potential growth, productivity, technology shocks/adoption/diffusion
    Date: 2020–06
  5. By: Burriel, Pablo; Checherita-Westphal, Cristina; Jacquinot, Pascal; Stähler, Nikolai; Schön, Matthias
    Abstract: The paper reviews the economic risks associated with regimes of high public debt through DSGE model simulations. The large public debt build-up following the 2009 global financial and economic crisis acted as a shock absorber for output, while in the recent and more severe COVID19-crisis, an increase in public debt is even more justified given the nature of the crisis. Yet, once the crisis is over and the recovery firmly sets in, keeping debt at high levels over the medium term is a source of vulnerability in itself. Moreover, in the euro area, where monetary policy focuses on the area-wide aggregate, countries with high levels of indebtedness are poorly equipped to withstand future asymmetric shocks. Using three large scale DSGE models, the simulation results suggest that high-debt economies (1) can lose more output in a crisis, (2) may spend more time at the zero-lower bound, (3) are more heavily affected by spillover effects, (4) face a crowding out of private debt in the short and long run, (5) have less scope for counter-cyclical fiscal policy and (6) are adversely affected in terms of potential (long-term) output, with a significant impairment in case of large sovereign risk premia reaction and use of most distortionary type of taxation to finance the additional debt burden in the future. Going forward, reforms at national level, together with currently planned reforms at the EU level, need to be timely implemented to ensure both risk reduction and risk sharing and to enable high debt economies address their vulnerabilities. JEL Classification: E62, H63, O40, E43
    Keywords: economic growth, fiscal sustainability, government debt, interest rates
    Date: 2020–07
  6. By: Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
    Abstract: In this paper we use a medium-scale DSGE model to quantitatively assess the macroeconomic stabilisation properties of a supranational unemployment insurance scheme. The model is calibrated to the euro area's core and periphery and features a rich fiscal sector, sovereign risk premia and labour market frictions. Adopting both simple policy rules and optimal policies, our simulations point to enhanced business cycle synchronisation and interregional consumption smoothing. Depending on the exact specification, the results suggest a reduction in the volatility of consumption by up to 49% at the region-level, while the cross-regional correlation of unemployment and inflation increases by up to 52% and 27%, respectively, compared to the decentralised setting. The higher degree of inter-regional risk-sharing comes at the cost of sizable fiscal transfers. Limiting such transfers via claw-back mechanisms implies a much weaker degree of stabilisation across countries. JEL Classification: F45, E63, E62, E24
    Keywords: fiscal union, monetary union, optimal policy, unemployment insurance
    Date: 2020–06
  7. By: Rünstler, Gerhard; Bräuer, Leonie
    Abstract: We study state dependence in the impact of monetary policy shocks over the leverage cycle for a panel of 10 euro area countries. We use a Bayesian Threshold Panel SVAR with regime classifications based on credit and house prices cycles. We find that monetary policy shocks trigger a smaller response of GDP, but a larger response of inflation during low states of the cycle. The shift in the inflation-output trade-off may result from higher macro-economic uncertainty in low leverage states. For an alternative regime classification based on turning points we find larger effects on GDP during contractions. JEL Classification: C32, E32, E44
    Keywords: Bayesian Threshold Panel VAR, financial cycle, monetary policy
    Date: 2020–06
  8. By: Sylvestre, Julie; Coutinho, Cristina
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework, from the first quarter of 2018 to the last quarter of 2019. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2020–06
  9. By: T. Flavin (Departmtent of Economics Finance and Accounting, National University of Ireland, Maynooth); M.Dongue (University of Tasmania); L. Sheenan (Queens University Belfast.)
    Abstract: We analyse the stability of the cross-market shock transmission mechanism between banks and sovereign bonds during the Eurozone sovereign debt crisis for crisis-hit periphery countries and Germany. We also examine the shock propagation of banking shocks and sovereign bond shocks between domestic and external markets. Using a Markov-switching framework, we find strong evidence of bilateral contagion between banks and sovereign bonds and also between domestic and external banking sectors. Sovereign bond markets are different. An external shock only produces contagious effects in Greece, who were largely dependent on external aid. For all the others, external shocks lead to decoupling as investors became increasingly discerning in their perception of the debt instruments issued by different Eurozone states.
    Keywords: Sovereign bonds; Debt crisis; Banking crisis; Eurozone; Markov-switching VAR.
    JEL: G01 G10 G21
    Date: 2020
  10. By: Joris M. Schröder
    Abstract: The US-centred debate on the decoupling of productivity from workers’ compensation has given rise to the question whether this decoupling has also taken place in other countries, and if so, to what degree. However, in-depth analyses of the extent and the underlying causes of wage-productivity decoupling within Europe are still sparse. This is particularly the case for the Central and East European members of the EU (EU-CEE11), where trickle down of increased labour productivity to local workers in the form of compensation and wage growth has been questioned. Existing analyses provide little explanation as to why the gains in productivity are (not) fully passed on in the form of higher compensation, and why this is more pronounced in some countries than in others. This study thus provides an overview of the extent and underlying factors of wage-productivity decoupling with a focus on the EU-CEE11 countries. In general, the results reveal strong cross-country variation in the amount and underlying reasons for decoupling. Further, we find that the extent of decoupling within the EU-CEE11 is strongly related to the industry structures of these countries, as it is mostly a phenomenon which occurs in countries that have followed an export- and manufacturing-focused development path, while other countries have experienced “reverse decoupling”. We provide further insights into this finding by contrasting productivity and compensation developments in industry and construction with those in the service sector and by looking at each EU-CEE11 country individually.
    Keywords: Labour productivity, compensation, wages, economic growth, wage inequality, labour share
    JEL: E24 J3 D3 J24
    Date: 2020–07
  11. By: Grande, Edgar; Vidal, Guillem
    Abstract: In this paper we analyze the 2019 EP elections from the voters' perspective. It is based on a novel post-electoral survey covering five North West European countries: Austria, Germany, France, Sweden and the UK. In particular we address the following questions: How important were the lead candidates in the election campaign? Which issues were most important for voters? How do these issues relate to voters' political preferences and ideological orientations? Our findings show that the Spitzenkandidaten process failed to effectively connect European party groups with their voters. Moreover, our analysis reveals that voters had clear issue priorities, which reflected, to a considerable extent, the new cleavage structure which has been shaping party competition in North West European countries in the last two decades.
    Keywords: European Union,EP elections,lead candidates,public opinion,cleavages
    Date: 2020
  12. By: Van Robays, Ine; Stracca, Livio
    Abstract: We identify the spill-over of demand shocks between the world's two largest advanced economies; the US and the euro area. We estimate a Bayesian VAR with sign restrictions, using standard restrictions for the domestic impact of the shock but a novel approach to identify the geographic location of the shocks and rule out common shocks. For the latter, we use the relative performance of small open economies that are neighbors of the US and the euro area, respectively Canada and Sweden, in addition to restricting the relative effects on the US, the euro area and the rest of the world. We find that demand spill-overs of US and euro area demand shocks become smaller on average when imposing relative restrictions, while they become larger in periods which are well-known to be specific to the US (global financial crisis) or the euro area (euro area sovereign debt crisis). Our results are confirmed by running a ‘placebo test’ where we replace the euro area with a small euro area economy, which should not have an independent effect on the US economy due to its small size. JEL Classification: C5, F41, F44
    Keywords: Bayesian VAR, international spillovers, open economy, sign restrictions.
    Date: 2020–06
  13. By: António Martins
    Abstract: The creation of the European Single Market (ESM) and the adoption of the Euro elim-inated barriers for capital mobility. This paper analysis the dependency of investment on domestic savings across European Union (EU) economies over three different time frames split by major milestones in the economic history of the union. Using a panel error correction model, I find evidence of low capital mobility before the creation of the ESM and after the crisis of 2008, suggesting that a solvency constraint can bind investment to domestic savings even when barriers for capital mobility are eliminated.The estimates suggest that there is a long-run relationship between the aforementioned aggregates associated with a solvency constraint. However, this constraint does not appear to be binding between 1993 and 2007, matching with an increased spreadin the current account balances between high and low income economies among the EU.Between 2007 and 2020, restrictions on borrowing faced by some EU economies reduced capital mobility, despite the absence of capital controls and exchange rate risk.
    Keywords: Current Account, Savings, Investment, Capital Mobility, Feldstein-Horioka Puzzle
    Date: 2020–07

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