nep-eec New Economics Papers
on European Economics
Issue of 2020‒10‒05
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Pricing of Bank Bonds, Sovereign Credit Risk and ECB's Asset Purchase Programmes By Ricardo Branco; João Pinto; Ricardo Ribeiro
  2. Does the Phillips curve help to forecast euro area inflation? By Bańbura, Marta; Bobeica, Elena
  3. Coin migration between Germany and other euro area countries By Uhl, Matthias
  4. The determinants of sovereign risk premiums in the UK and the European government bond market: The impact of Brexit By Samir Kadiric
  5. The structural adjustment of the Portuguese economy in the context of the economic reform of the Eurozone By Marta Silva; João Carlos Lopes
  6. The emergence of core-periphery structures in the European Union: A complexity perspective By Gräbner, Claudius; Hafele, Jakob
  7. The Effect on Foreign Direct Investment of Membership in the European Union By Bruno, Randolph Luca; Campos, Nauro F.; Estrin, Saul
  8. Stablecoins: Implications for monetary policy, financial stability, market infrastructure and payments, and banking supervision in the euro area By Force, ECB Crypto Assets Task
  9. Macroeconomic Aspects of the Coronavirus Epidemic: Eurozone, EU, US and Chinese Perspectives By Paul J.J. Welfens
  10. Does cohesion policy reduce EU discontent and Euroscepticism? By Andres Rodriguez-Pose; Lewis Dijkstra;
  11. Banking euro area stress test model By Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
  12. Capital Flows and the Stabilizing Role of Macroprudential Policies in CESEE By Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
  13. Monetary policy and stock market valuation By Laine, Olli-Matti
  14. Are COVID Fatalities in the US Higher Than in the EU, and If So, Why? By Aparicio Fenoll, Ainoa; Grossbard, Shoshana
  15. Europe Beyond Coal – An Economic and Climate Impact Assessment By Böhringer, Christoph; Rosendahl, Knut Einar
  16. Nonlinearities and expenditure multipliers in the Eurozone. By Andrea Boitani; Salvatore Perdichizzi; Chiara Punzo

  1. By: Ricardo Branco (Mazars Portugal and Universidade Católica Portuguesa, Católica Porto Business School); João Pinto (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Ricardo Ribeiro (Universidade Católica Portuguesa, Católica Porto Business School and CEGE)
    Abstract: The 2008 Global financial crisis and the subsequent European sovereign debt crisis deteriorated banks funding conditions and lead to a substitution effect among bond instruments. We examine the pricing of straight, covered and securitization bonds issued by European banks in the 2000-2016 period, with a particular focus on the effect of sovereign credit risk and ECB's asset purchase programmes on spreads. We nd that (i) straight, covered and securitization bonds are priced in segmented markets, (ii) the impact of common pricing determinants on spreads differ significantly between non-crisis and crisis periods, (iii) sovereign credit risk is an important determinant of banks' cost of funding, especially in crisis periods, (iv) ECB's asset purchase programmes exhibited mixed effectiveness in improving banks funding conditions, (v) contractual bond characteristics other than credit ratings, macroeconomic factors and bank characteristics are important determinants of spreads, and (vi) there is evidence of heterogeneity across countries.
    Keywords: Straight Bonds; Covered Bonds; Securitization Bonds; Bond Pricing; Sovereign Risk; Asset Purchase Programmes
    JEL: E52 G01 G12 G21 G32
    Date: 2020–01
  2. By: Bańbura, Marta; Bobeica, Elena
    Abstract: We find that it does, but choosing the right specification is not trivial. We unveil notable model instability, with breaks in the performance of most simple Phillips curves. Euro area inflation was particularly hard to forecast in the run-up to the EMU and after the sovereign debt crisis, when the trend and for the latter period, also the amount of slack, were harder to pin down. Yet, some specifications outperform a univariate benchmark most of the time and are thus a useful element in a forecaster's toolkit. We base these conclusions on an extensive forecast evaluation over 1994 - 2018, an extraordinarily long period by euro area standards. We complement the analysis using real-time data over 2005-2018. As lessons for practitioners, we find that: (i) the key type of time variation to consider is an inflation trend; (ii) a simple filter-based output gap works well overall as a measure of economic slack, but after the Great Recession it is outperformed by endogenously estimated slack or by estimates from international economic institutions; (iii) external variables do not bring forecast gains; (iv) newer generation Phillips curve models with several time-varying features are a promising avenue for forecasting, especially when density forecasts are of interest, and finally, (v) averaging over a wide range of modelling choices offers some hedge against breaks in forecast performance. JEL Classification: C53, E31, E37
    Keywords: C53, E31, E37
    Date: 2020–09
  3. By: Uhl, Matthias
    Abstract: Euro coins have a common European side and an individual national side. Thanks to coin migration, coins bearing a panoply of national sides are in circulation throughout the euro area. In this paper, we model the mixing of coins circulating in the euro area countries and in particular the extent of coin migration in the euro area. A model calibration suggests that, for the coin denominations €2, €1, 50 cent and 20 cent roughly the same quantity of euro coins migrate from Germany to the rest of the euro area as vice versa. Accordingly, the relatively large quantities of coins issued by the Federal Republic of Germany are not materially explained by exports of coins to other euro area countries.
    Keywords: Euro coins,coin circulation,coin mixing
    JEL: E41
    Date: 2020
  4. By: Samir Kadiric (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: This paper analyzes recent developments in the British and European government bond markets with reference to the United Kingdom´s decision to leave the European Union. The two main goals of the study are, firstly, to examine whether the Brexit referendum result has affected the risk premium and, secondly, whether there are any changes in risk pricing following the referendum. The paper finds a significant impact of the Brexit referendum on the risk premium in selected economies. Furthermore, the results suggest that there is a considerable change in risk pricing after the announcement of the referendum result. Credit default risk and the risk aversion play a much important role in the post-referendum period than they did prior to the vote, particularly in the United Kingdom.
    Keywords: asset pricing, government bond yield spreads, risk premium, UK, Europe, Brexit
    JEL: E43 E44 F36 G12 G15
    Date: 2020–03
  5. By: Marta Silva; João Carlos Lopes
    Abstract: This paperaims at analyzing the structural changes that occurred in the Portuguese economy after the 2010/2013 sovereign debt crisis, compared with what occurred in Germany and using the current debate surrounding the new reform of the Eurozone as a backdrop. We thus intend to find out whether a peripheral southern economy like Portugal and the Eurozone’s nuclear economy (Germany) have become closer and, if so, what that means in terms of the sustainability of the Eurozone as a set of different economies sharing the same currency. The study will be framed in the varieties of capitalism theory and in the theory of growth regimes.
    Keywords: sovereign debtcrisis, growth regimes, realconvergence, economic structure, varieties of capitalism, Eurozone, Portugal, Germany
    JEL: F45 O11 O47 O52 O57
    Date: 2020–09
  6. By: Gräbner, Claudius; Hafele, Jakob
    Abstract: This paper investigates the emergence of polarisation patterns in the EU during the last 60 years from a structuralist and complexity economics perspective. Based on the results, feasible opportunities for EU policy-making, which aim to counteract a tendency of polarization, are delineated. The study comprises of a historical analysis of the politico-economic events during this time and a complementary quantitative analysis of the European trade network. The results suggest that trade in the Eurozone is unequal at the expense of the peripheries and follows a pattern of "unequal technological exchange". The paper also assesses the usefulness of country taxonomies such as 'cores' and 'peripheries' for identifying the roots of polarization patterns. While it generally affirms the relevance of structural dependencies, and confirms the epistemic usefulness of country taxonomies, it also highlights three challenges - the challenges of dynamics, of ambiguity and granularity - that any such taxonomy necessarily faces, and which must be dealt with explicitly in any structuralist analysis using such taxonomies.
    Date: 2020
  7. By: Bruno, Randolph Luca (University College London); Campos, Nauro F. (University College London); Estrin, Saul (London School of Economics)
    Abstract: This paper explores the impact of EU membership on foreign direct investment (FDI). It analyses empirically how the effects of such deep integration differ from other forms and investigates what drives these effects. Using a structural gravity framework on annual bilateral FDI data for almost every country in the world, over 1985-2018, we find EU membership leads FDI into the host economy to be about 60% higher for investment from outside the EU, and around 50% higher for intra-EU FDI. Moreover, we find that the effect of EU membership on FDI is larger than from membership of NAFTA, EFTA, or MERCOSUR, and that the Single Market is the cornerstone of this differential impact.
    Keywords: European Union, foreign direct investment, economic integration, Structural Gravity Model, single market
    JEL: F21 F36 O52
    Date: 2020–09
  8. By: Force, ECB Crypto Assets Task
    Abstract: This paper summarises the outcome of an analysis of stablecoins undertaken by the ECB Crypto-Assets Task Force. At the time of writing, the stablecoin debate lacks a common taxonomy and unambiguous terminology. This paper applies a definition that distinguishes stablecoins from existing forms of currencies – regardless of the technology used – and characterises stablecoin arrangements based on the functions they fulfil. This approach emphasises the role of technology-neutral regulation in preventing arbitrage, as well as comprehensive Eurosystem oversight, irrespective of stablecoins’ regulatory status. Against this background, this paper assesses stablecoins’ implications for the euro area based on three scenarios for the uptake of stablecoins: (i) as a crypto-assets accessory function; (ii) as a new payment method; and (iii) as an alternative store of value. While the first scenario is merely the continuation of the current state of the market and, thus far, has not posed concerns for the financial sector and/or central bank tasks, stablecoins of the type envisaged in the second scenario may reach a scale such that financial stability risks can become material, and the safety and efficiency of the payment system may be affected. The third scenario is both the least plausible and the most relevant from a monetary policy perspective. The paper concludes that the Eurosystem relies on appropriate regulation, oversight, and supervision to manage the implications of stablecoins (and the risks that stem from them) on its mandate and tasks under plausible scenarios. The Eurosystem continues monitoring the evolution of the stablecoin market and stands ready to respond to rapid changes in all possible scenarios. JEL Classification: E42, G21, G23, O33
    Keywords: implications of stablecoins, oversight, regulation, stablecoins
    Date: 2020–09
  9. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The Corona Virus (COVID-19) epidemic represents a major challenge for the world economy. While a detailed longer-term diffusion path of the new virus cannot be anticipated for individual countries, with the possible exception of China, which was the starting point of the international epidemic, one should expect falling asset prices in Asia, the United States and the European Union plus the United Kingdom Ð except for the price of risk-free government bonds. In the course of 2020/21 the US, the EU and the UK, as well as other countries, will face both an increasing number of infected patients as well as a higher case fatality ratio. Health care expenditures in the US will increase more than in the Eurozone and the EU in the medium term, a development that undermines the international competitiveness of the United States. In the US, the spread of the COVID-19 could raise the ratio of health expenditures relative to GDP beyond the current 18% while the health care expenditure of Western EU countries will not rise much beyond the current 10% (12% in France, 11% in Germany in 2018). To the extent that morbidity and mortality in industrialized countries is a positive function of age, higher health expenditures for patients above 65 years of age should be anticipated; in the US with considerable higher government health expenditures. Hence, the US deficit-GDP ratio will remain high. A rising health care-GDP ratio in the US is equivalent to a rising US export tariff; already in the current situation Ð prior to 2020 Ð the transatlantic differential in health care-GDP ratios implies that Western European countries will face a relative cost advantage in the context of the Corona virus epidemic so that the trade balance surplus of the Eurozone could rise unless supply-side shocks in the EU exceed those of the US. The COVID-19 challenge for the US Trump Administration is a serious one, since the lack of experts in the Administration will become more apparent in such a systemic stress situation Ð and this might well affect the November 2020 US presidential election which, in turn, would itself have considerable impacts on the UK and the EU27 as well as EU-UK trade negotiations.
    Keywords: Coronavirus, Health System, Macroeconomics, EU, US, China
    JEL: I11 I18 F01 H51
    Date: 2020–03
  10. By: Andres Rodriguez-Pose; Lewis Dijkstra;
    Abstract: Some regions in Europe that have been heavily supported by the European Union’s cohesion policy have recently opted for parties with a strong Eurosceptic orientation. The results at the ballot box have been put forward as evidence that cohesion policy is ineffective for tackling the rising, European- wide wave of discontent. However, the evidence to support this view is scarce and, often, contradictory. This paper analyses the link between cohesion policy and the vote for Eurosceptic parties. It uses the share of votes cast for Eurosceptic parties in more than 63,000 electoral districts in national legislative elections in the EU28 to assess whether cohesion policy investment since 2000 has made a difference for the electoral support for parties opposed to European integration. The results indicate that cohesion policy investment is linked to a lower anti-EU vote. This result is robust to employing different econometric approaches, to considering the variety of European development funds, to different periods of investment, to different policy domains, to shifts in the unit of analysis, and to different levels of opposition by parties to the European project.
    Keywords: Euroscepticism, anti-system voting, populism, cohesion policy, elections, regions, Europe
    JEL: D72 R11 R58
    Date: 2020–09
  11. By: Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large scale semi-structural model developed to assess the resilience of the euro area banking system from a macroprudential perspective. The model combines the dynamics of a high number of euro area banks with that of the euro area economies. It reflects banks’ heterogeneity by replicating the structure of their balance sheets and profit and loss accounts. In the model, banks adjust their assets, interest rates, and profit distribution in line with the economic conditions they face. Bank responses feed back to the macroeconomic environment affecting credit supply conditions. When applied to a stress test of the euro area banking system, the model reveals higher system-wide capital depletion than the analogous constant balance sheet exercise. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2020–09
  12. By: Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -- a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -- besides domestic macroeconomic quantities -- for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.
    Date: 2020–09
  13. By: Laine, Olli-Matti
    Abstract: This paper estimates the effect of the European Central Banks’s monetary policy on the term structure of expected stock market risk premia. Expected stock market premia are solved using analysts’ dividend forecasts, the Eurostoxx 50 stock index and Eurostoxx 50 dividend futures. Although risk-free rates have decreased after the global financial crisis, the results indicate that the expected average stock market return has remained quite stable at around 9 percent. This implies that the expected average stock market risk premium has increased since the financial crisis. The effect of monetary policy on expected premia is analysed using VAR models and local projection methods. According to the results, monetary policy easing raises the average expected premium. The effect is explained by a rise in long-horizon expected premia.
    JEL: E52 G12
    Date: 2020–09–18
  14. By: Aparicio Fenoll, Ainoa; Grossbard, Shoshana (San Diego State University)
    Abstract: The COVID crisis has severely hit both the United States and the European Union. Even though they are the wealthiest regions in the world, they differ substantially in economic performance, demographic characteristics, type of government, health systems, and measures undertaken to counteract COVID. We construct comparable measures of the incidence of the COVID crisis and find that US states had more COVID-related deaths than EU countries. When taking account of demographic, economic, and political factors (but not health-policy related factors) we find that fatalities at 100 days since onset are 1.3 % higher in a US state than in an EU country. The US/EU gap disappears when we take account of health-policy related factors. Differences in number of beds per capita, number of tests, and early lockdown measures help explain the higher impact of COVID on US fatalities measured either 50 or 100 days after the epidemic started in a nation/state.
    Keywords: COVID-19, mortality, Europe, US, health policy
    JEL: I18 J1 J18
    Date: 2020–09
  15. By: Böhringer, Christoph (Department of Business Administration, Economics and Law, University of Oldenburg); Rosendahl, Knut Einar (School of Economics and Business, Norwegian University of Life Sciences)
    Abstract: Several European countries have decided to phase out coal power generation. Emissions from electricity generation are already regulated by the EU Emissions Trading System (ETS), and in some countries like Germany the phaseout of coal will be accompanied with cancellation of emissions allowances. In this paper we examine the consequences of phasing out coal, both for the broader economy, the electricity sector, and for CO2 emissions. We show analytically how the welfare impacts for a phaseout region depend on i) whether and how allowances are canceled, ii) whether other countries join phaseout policies, and iii) terms-of-trade effects in the ETS market. Based on numerical simulations with a computable general equilibrium model for the European economy, we quantify the economic and environmental impacts of alternative phaseout scenarios, considering both unilateral and multilateral phaseout. We find that terms-of-trade effects in the ETS market play an important role for the welfare effects across EU member states. For Germany, coal phaseout combined with unilateral cancellation of allowances is found to be welfare-improving if the German citizens value emissions reductions at 65 Euro per ton or more.
    Keywords: Coal phaseout; emissions trading; electricity market
    JEL: D61 F18 H23 Q54
    Date: 2020–06–30
  16. By: Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Salvatore Perdichizzi; Chiara Punzo
    Abstract: We analyze the non-linear effects of government spending for the Euro area in recession, by using local projection method and by testing whether the impact of the shock depends crucially on the levels of public debt or the depth of the recession. We provide three insights. First, expenditure mul-tipliers are not strongly state-dependent but they are always above unity. Second, state dependency emerges as soon as deep recession is distinguished from ordinary downturns. Third, fiscal space matters: expenditure multi-pliers are larger in low fiscal space, high debt, South-EZ countries than in low-debt, North-EZ countries.
    Keywords: Expenditure multipliers, State-dependent fiscal policy, Fiscal consolidation.
    JEL: E32 E62
    Date: 2020–06

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