nep-eec New Economics Papers
on European Economics
Issue of 2020‒09‒28
five papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. A Global Economy Version of QUEST: Simulation Properties By Matthias Burgert; Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
  2. The Role of Economic Uncertainty in Rising Populism in the EU By Giray Gozgor
  3. Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates By Harald Badinger; Stefan Schiman
  4. Exploring BIS credit-to-GDP gap critiques: the Swiss case By Terhi Jokipii; Reto Nyffeler; Stéphane Riederer
  5. Are We More Accurate? Revisiting the European Commission’s Macroeconomic Forecasts By Andras Chabin; Sébastien Lamproye; Milan Výškrabka

  1. By: Matthias Burgert; Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
    Abstract: This paper presents the structure and simulation properties of a core version of QUEST, an open-economy New Keynesian DSGE model developed and maintained by the European Commission. The multi-region model version with tradable goods, non-tradable goods and housing includes the euro area (EA), the nonEA EU plus the UK, the United States, Japan, Emerging Asia, and the rest of the world. The paper presents simulation results for a series of goods, factor, financial market, and policy shocks to illustrate how the structure of the model and its theoretical underpinnings shape the transmission of shocks to real and financial variables of the domestic economy and international spillover. In particular, the paper shows impulse responses for monetary policy, consumption, risk premia, productivity, credit, government spending, unconventional monetary policy and tariff shocks, and characterises their impact on real GDP, domestic demand components, trade, external balances, wages, employment, price levels, relative prices, interest rates, and public finances. While the scenarios are illustrative, they reflect important elements of the Global recession and the EA crisis (global risk shocks, private sector demand shocks and deleveraging) and of policy responses (fiscal policy, unconventional monetary policy) and challenges (protectionism) in recent years. In view of the macroeconomic conditions during this period, the paper shows simulations for an environment in which the zero lower bound on monetary policy is binding in addition to simulations under standard monetary policy.
    JEL: E37 E62 F47
    Date: 2020–06
  2. By: Giray Gozgor
    Abstract: This paper examines the impact of economic uncertainty shocks on the populist voting behavior in the panel dataset of 24 European Union (EU) countries for the period from 1980 to 2020. In so doing, we focus on the shares of total populism, right-wing populism, and left-wing populism votes as well as a new indicator of economic uncertainty, so-called, the “World Uncertainty Index (WUI).” Using the fixed-effects, bias-corrected least-squares dummy variable (LSDVC), and Instrumental Variables (IV) estimations, we show that a higher level of the WUI is positively related to total populism and right-wing populist voting behavior. The baseline results remain consistent when we deal with potential issues of endogeneity, to address omitted variable bias, and to exclude the outliers.
    Keywords: populist attitudes in the European Union, voting behaviour, right-wing populism, left-wing populism, uncertainty shocks, economic policy uncertainty
    JEL: D72 D81 C33
    Date: 2020
  3. By: Harald Badinger (Department of Economics, Vienna University of Economics and Business); Stefan Schiman (Austrian Institute of Economic Research (WIFO))
    Abstract: We propose a novel identification strategy to measure monetary policy in a structural VAR. It is based exclusively on known past policy shocks, which are uncovered from high-frequency data, and does not rely on any theoretical a-priori restrictions. Our empirical analysis for the euro area reveals that interest rate decisions of the ECB surprised financial markets at least fifteen times since 1999. This information is used to restrict the sign and magnitude of the structural residuals of the policy rule equation at these shock dates accordingly. In spite of its utmost agnostic nature, this approach achieves strong identification, suggesting that unexpected ECB decisions have an immediate impact on the short-term money market rate, the narrow money stock, commodity prices, consumer prices and the Euro-Dollar exchange rate, and that real output responds gradually. Our close to assumption-free approach obtains as an outcome what traditional sign restrictions on impulse responses impose as an assumption.
    Keywords: Structural VAR, Set Identification, Monetary Policy, ECB
    JEL: C32 E52 N14
    Date: 2020–07
  4. By: Terhi Jokipii; Reto Nyffeler; Stéphane Riederer
    Abstract: A growing body of literature has highlighted two important caveats to the credit-to-GDP gap as advocated by the Bank for International Settlements (BIS). The first relates to the approach used to normalise credit (i.e., dividing nominal credit by GDP). In this regard, critics have argued that a normalised measure of credit runs the risk of being affected by GDP movements that may or may not be relevant. The second relates to the use of the Hodrick-Prescott (HP) filter to estimate the gap's trend component. In this regard, critics have emphasised several measurement problems associated with using the HP filter. In this paper, we assess the relevance of these critiques for Switzerland. While we find no compelling evidence suggesting a need to deviate from using the BIS gap as a reliable excess credit measure, our findings do emphasise the need to interpret its signal with caution, particularly during long-lasting boom phases and subsequent bust phases. In these situations in particular, authorities should strengthen their decision-making frameworks with additional credit relevant indicators.
    Keywords: BIS gap, credit-to-GDP, macroprudential policy, HP filter
    JEL: E61 E44 E51 G01 G21
    Date: 2020
  5. By: Andras Chabin; Sébastien Lamproye; Milan Výškrabka
    Abstract: In this paper, we present the results of the comprehensive assessment of the accuracy of European Economic Forecasts. High-quality macroeconomic forecasts are a prerequisite for economic surveillance of the European Commission. We evaluate forecasts for three key variables – GDP growth, consumer price inflation and the general government budget balance – on two forecast horizons – current year and oneyear-ahead – over the period 2000-2017. Pointing to some improvement in the accuracy recently, the forecasts continue to show a satisfactory track record which does not differ much from the forecast track records of other international institutions. The Commission’s forecasts present largely an unbiased outlook for near term economic developments, accurately foresee an acceleration and deceleration in the underlying variables and mostly contain information beyond a naïve forecast. There is room for improvement, however. The forecasts appear to be prone to repeating errors, which to some extent seems to be related to an overly conservative assessment of the business cycle dynamics and to a lesser extent to errors in technical assumptions.
    JEL: C1 E60 E66
    Date: 2020–07

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