nep-eec New Economics Papers
on European Economics
Issue of 2020‒11‒09
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. PCCI – a data-rich measure of underlying inflation in the euro area By Bańbura, Marta; Bobeica, Elena
  2. Money markets, central bank balance sheet and regulation By Corradin, Stefano; Eisenschmidt, Jens; Hoerova, Marie; Linzert, Tobias; Schepens, Glenn; Sigaux, Jean-David
  3. Setting New Priorities for the ECB's Mandate By Christophe Blot; Jérôme Creel; Emmanuelle Faure; Paul Hubert
  4. How to spend it: A proposal for a European Covid-19 recovery programme By Jérôme Creel; Mario Holzner; Francesco Saraceno; Andrew Watt; Jérôme Wittwer
  5. Monetary policy effects in times of negative interest rates: What do bank stock prices tell us? By Joost Bats; Massimo Giuliodori; Aerdt Houben
  6. Taxation of Household Capital in EU Member States Impact on Economic Efficiency, Revenue and Redistribution By Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
  7. The wage-price pass-through in the euro area: does the growth regime matter? By Hahn, Elke
  8. Determinants of Banks’ Liquidity: a French Perspective on Interactions between Market and Regulatory Requirements By de Bandt Olivier; Lecarpentier Sandrine; Pouvelle Cyril
  9. How and How Much? The Growth-Friendliness of Public Spending through the Lens By Alessandra Cepparulo; Gilles Mourre

  1. By: Bańbura, Marta; Bobeica, Elena
    Abstract: This paper details the rationale and methodology behind the construction of the Persistent and Common Component of Inflation (PCCI), a measure of underlying inflation in the euro area. The PCCI reflects the view that underlying inflation captures widespread developments across the Harmonised Index of Consumer Prices (HICP) basket and that it is the persistent component of inflation. Methodologically, it relies on a generalised dynamic factor model estimated on a large set of disaggregated HICP inflation rates for 12 euro area countries. For each individual inflation rate, we estimate a low-frequency common component, i.e. a component driven by shocks or factors that are relevant for all inflation series and capturing cycles longer than three years. The PCCI is a weighted average of these common components. It is an alternative to the typical exclusion-based measures used to gauge underlying inflation (e.g. HICP excluding food and energy), as it does not a priori exclude any HICP items. It exhibits a set of desirable properties as a measure of underlying inflation, and it is a good tracker of more lasting inflationary developments (judging by smoothness and bias). Furthermore, it is timely and signals turning points with some lead, while acting as an attractor for headline inflation. JEL Classification: C32, E31, E32, E52
    Keywords: dynamic factor model, frequency domain, Underlying (core) inflation
    Date: 2020–10
  2. By: Corradin, Stefano; Eisenschmidt, Jens; Hoerova, Marie; Linzert, Tobias; Schepens, Glenn; Sigaux, Jean-David
    Abstract: This paper analyses money market developments since 2005, and examines factors that have affected money market functioning. We consider several metrics of activity in both secured and unsecured euro area money markets, and study interactions with new Basel III regulations and with central bank policies (liquidity provision, asset purchases and the Securities Lending Programme). Using aggregate data, we document that, prior to 2015, heightened financial market volatility coincided with worsening money market conditions, while higher central bank liquidity provision was associated with reduced money market stress. After 2015, the evidence is consistent with central bank asset purchases inducing scarcity effects in some money market segments, and with active securities lending supporting money market functioning. Using transactions-level money market data combined with supervisory data, we further document that the leverage ratio regulation impacts money markets at quarter-ends due to “window-dressing” effects, reducing money market volumes and rates. We also consider the macroeconomic impact of changing money market conditions, finding that the impact depends on whether frictions originate in secured or unsecured markets and on central bank policies in place. JEL Classification: E44, E58, G12, G20, G28
    Keywords: E44, E58, G12, G20, G28
    Date: 2020–10
  3. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Emmanuelle Faure; Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: In a statement announcing the review of its monetary policy strategy, the Euro-pean Central Bank (ECB) stated that it will, in addition to price stability, also take into account how “other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB's mandate”. The key question is which precise objectives shall be taken into account and how the ECB might reach them, keeping in mind that some trade-offs vis-à-vis the primary objective may arise. [First paragraph]
    Keywords: Priorities; ECB's mandate
    Date: 2020–06–08
  4. By: Jérôme Creel (Observatoire français des conjonctures économiques); Mario Holzner; Francesco Saraceno (Observatoire français des conjonctures économiques); Andrew Watt (Macroeconomic Policy Institute (IMK)); Jérôme Wittwer (Bordeaux population health (BPH))
    Abstract: ■The Recovery Fund recently proposed by the EU Commission marks a sea-change in European integration. Yet it will not be enough to meet the challenges Europe faces. There has been much public debate about financing, but little about the sort of concrete projects that the EU should be putting public money into.■Here we propose a 10-year, €2tn investment programme focusing on public health, transport infrastructure and energy/decarbonisation. ■It consists of two pillars. In a national pillar Member States — broadly as in theCommission proposal — would be allocated €500bn. Resources should be focused on the hardest-hit countries and front-loaded: we suggest over a three-year horizon.■The bulk of the money —€1.5tn — would be devoted to finance genuinely European projects, where there is an EU value added. We describe a series of flagship initiatives that the EU could launch in the fields of public health, transport infrastructure and energy/decarbonisation. ■We call for a strengthened EU public health agency that invests in health-staff skillsand then facilitates their flexible deployment in emergencies, and is tasked withensuring supplies of vital medicines (Health4EU). ■We present costed proposals for two ambitious transport initiatives: a dedicated European high-speed rail network, the Ultra-Rapid-Train, with four-routes cuttingtravel times between EU capitals and regions, and, alternatively, an integrated European Silk Road initiative that combines transport modes on the Chinese model. ■In the area of energy/decarbonisation we seek to “electrify” the Green Deal. We call for funding to accelerate the realisation of a smart and integrated electricity gridfor 100%-renewable energy transmission (e-highway), support for complementary battery and green-hydrogen projects, and a programme, modelled on the SURE initiative, to co-finance member-state decarbonisation and Just Transition policies.■The crisis induced by the pandemic, coming as it does on top of the financial and euro crises, poses a huge challenge. The response needs to take account of the longer-run structural challenges, and above all that of climate change. The European Union should rise to these challenges in the reform of an ambitious medium-runrecovery programme, appropriately financed. An outline of such a programme isset out here by way of illustration, but many permutations and options are available to policymakers.
    Keywords: European recovery programme; Covid-19
    Date: 2020–06–18
  5. By: Joost Bats; Massimo Giuliodori; Aerdt Houben
    Abstract: Do negative interest rates matter for bank performance? This paper investigates whether monetary policy surprises impact bank stock prices differently in times of positive and negative interest rates. The analysis controls for broad stock market movements and finds that an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve resulting from monetary policy announcements reduce bank stock prices in a low and especially negative interest rate environment. The effects persist in the days after the monetary policy announcement and are larger for banks relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in a negative interest rate environment. The results indicate that when market interest rates are negative but deposit rates stuck at zero, monetary policy instruments that target the longer-end of the yield curve are less detrimental to bank performance than those that target the shorter-end of the yield curve.
    Keywords: Monetary policy; bank stock prices; negative interest rates
    JEL: E43 E44 E52 G12 G21
    Date: 2020–10
  6. By: Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
    Abstract: Taxation of capital, including the taxation of capital income and stocks, could play an important role in increasing revenue efficiency and making the tax system fairer. Recent international tax developments on automatic exchange of information and administrative co-operation have increased the capacity of Member States to raise taxes from mobile tax bases such as capital income. This paper first analyses the tax treatment of household capital income. It presents the theoretical features of the optimal taxation of capital income and describes the tax treatment of income from different capital assets in EU Member States. The paper then focusses on the taxation of owner-occupied housing and measures the impact of specific tax features on the cost of home ownership by using an indicator-based analysis. Then, it analyses specific issues in capital gains taxation and their macroeconomic effects. Finally, the paper explores the possibilities of increasing revenue efficiency through wealth transfer taxes, i.e. inheritance and gift taxes. It provides an up-to-date review of the theoretical arguments and the practical implementation of such taxes in EU Member States and tries to shed light on the reasons why these taxes contribute only little to raising revenues.
    JEL: D1 D2 D3 E6 H2 H21 J08 J2
    Date: 2020–08
  7. By: Hahn, Elke
    Abstract: This paper explores whether the transmission mechanism between wages and prices in the euro area is affected by the growth regime. Since the great financial crisis inflation developments have posed major puzzles to economists as inflation declined by less than was widely expected during the past recessions and rose by less during the subsequent recoveries. This paper analyses whether the wage-price pass-through may have contributed to these inflation puzzles. Applying the Threshold VAR model proposed by Alessandri and Mumtaz (2017) to the analysis of the wage-price pass-through, the paper examines whether the transmission mechanim of different types of shocks differs between recessions and expansions. The results point to differences in the wage-price pass-through between growth regimes for demand shocks but not for wage mark-up shocks. They show a much smaller response of prices relative to wages, i.e. a smaller wage-price pass-through, for demand shocks in recessions than in expansions. This is accounted for by a smaller relative response of profit margins. More generally, the results suggest that the slope of the price Phillips curve flattens in recessions on account of the lower wage-price pass-through, while the wage Phillips curve appears to be broadly stable across growth regimes. Overall, the results contribute to solve or diminish the puzzle of the missing disinflation of the past two recessions suggesting that inflation should be expected to recede by less during recessions than indicated by standard linear models. JEL Classification: C32, E31, J30
    Keywords: euro area inflation, growth regimes, threshold VAR, wage-price pass-through
    Date: 2020–10
  8. By: de Bandt Olivier; Lecarpentier Sandrine; Pouvelle Cyril
    Abstract: The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets. According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side.
    Keywords: Bank Capital Regulation, Bank Liquidity Regulation, Basel III, Stress Tests.
    JEL: G28 G21
    Date: 2020
  9. By: Alessandra Cepparulo; Gilles Mourre
    Abstract: The paper analyses the growth-friendliness of public spending in EU countries over the decade 2007-2016. It looks into the composition, performance and efficiency of public expenditure across countries and specific functions of government. This approach allows for some granularity in the analysis. Using a literature survey, semi-disaggregated composite indicators of performance and an efficiency frontier approach, the analysis provides a rich set of results on the quality of public spending, giving first indications on where room for improvements appears to be large. The overall results turn out fairly mixed, providing a nuanced picture of the growth-friendliness of public expenditure in the EU both in terms of level and change.
    JEL: C14 E62 H11 H50
    Date: 2020–10

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