nep-eec New Economics Papers
on European Economics
Issue of 2020‒11‒16
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Better off without the Euro? A Structural VAR Assessment of European Monetary Policy By Jan Philipp Fritsche; Patrick Christian Harms
  2. Shadow of the Colossus: Euro Area Spillovers and Monetary Policy in Central and Eastern Europe By Makram El-Shagi; Kiril Tochkov
  3. Disentangling the effects of multidimensional monetary policy on inflation and inflation expectations in the euro area By Martínez-Hernández, Catalina
  4. Portugal’s Performance after the Macroeconomic Adjustment Programme By Christian Weise
  5. Macroeconomic policy lessons from Greece By Economides, George; Papageorgiou, Dmitris; Philippopoulos, Apostolis
  6. The sustainability of external imbalances in the European periphery By Monastiriotis, Vassilis; Tunali, Cigdem Borke
  7. The Single Supervisory Mechanism and its implications for the profitability of European Banks By Ioanna Avgeri; Yiannis Dendramis; Helen Louri
  8. Interest rate-growth differentials on government debt: an empirical investigation for the euro area By Checherita-Westphal, Cristina; Domingues Semeano, João
  9. Fuel up with OATmeals! The case of the French nominal yield curve By Olesya Grishchenko; Franck Moraux; Olga Pakulyak
  10. The German Federal Constitutional Court ruling and the European Central Bank's strategy By Feld, Lars P.; Wieland, Volker
  11. The political economy of industrial policy in the European Union By Bulfone, Fabio
  12. Euro-US Dollar Exchange Rate Dynamics at the Effective Lower Bound By Eric McCoy
  13. Uncertain Times: The Macroeconomic Effects of Brexit By Myrto Oikonomou
  14. Are long-run output growth rates falling? By Mengheng Li; Ivan Mendieta-Muñoz

  1. By: Jan Philipp Fritsche; Patrick Christian Harms
    Abstract: Modern OCA theory has developed different conclusions on when forming a currency union is beneficial. An important pragmatic question in this context is: Did delegating monetary policy to the ECB increase stress in the individual euro area countries? An SVAR analysis reveals that monetary stress has declined more in the euro area than in the euro areas’ doppelganger. The synthetic doppelganger is composed of other OECD countries. This result is independent of the identification strategy (sign restrictions/heteroskedasticity/Cholesky). The results can be rationalized by more formalized central banking and the euro becoming a dominant currency.
    Keywords: Economic and Monetary Union, ECB, euro area, structural vector autoregressions, monetary policy stress, sign restrictions, heteroskedasticity, dominant currency
    JEL: C32 E42 E52 F45
    Date: 2020
  2. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US)
    Abstract: Closer integration between Central and Eastern Europe (CEE) and the EUCloser integration between Central and Eastern Europe (CEE) and the EU has opened up channels facilitating the propagation of economic shocks from the core to the eastern periphery. This paper examines the effects of such shocks to economic activity and monetary conditions originating in the Euro area (EA) on output, prices, money, and interest rates in 10 CEE countries over the period 2005-2018 using a bilateral restricted VAR framework. In contrast to previous studies, we use Divisia monetary aggregates and compare the effects of EA spillovers to domestic shocks. The results indicate that EA shocks explain the majority of variation across all macroeconomic indicators, with money supply shocks playing the most prominent role. Despite some heterogeneity, the impulse response of monetary aggregates to domestic andEA monetary shocks is almost identical across countries. The impact of the EA shock increases over time and persists, while the domestic shock dies out relatively quickly. Accordingly, we find no meaningful monetary independence in the majority of CEE countries. This is likely to prove detrimental to the effectiveness of monetary policies in CEE.
    Keywords: Monetary policy, spillover, Divisia, Central and Eastern Europe
    JEL: E52 E43 E58
    Date: 2020–11
  3. By: Martínez-Hernández, Catalina
    Abstract: The European Central Bank (ECB) has adopted a mixture of conventional and unconventional tools in order to achieve its mandate of price stability in the current low-inflation, low-interest-rate scenario. This paper contributes to the existing literature by providing a taxonomy of the ECB's policy toolkit and by evaluating its implications on price stability and the anchoring of inflation expectations. I carry out my analysis based on a high-frequency identification and the estimation of a large Bayesian Vector Autoregression. I find evidence of re-anchored expectations as response to quantitative easing and forward guidance, i.e. forecasters revise their long-run expectations upwards. Consequently, inflation increases, which stresses the crucial role of expectations for the transmission of monetary policy.
    Keywords: Inflation Expectations,Monetary Policy,Large BVAR,High-frequency identification
    JEL: E52 C55 C11 C32 E31
    Date: 2020
  4. By: Christian Weise
    Abstract: Portugal experienced a deep economic and financial crisis that led to an EU/IMF programme from 2011 to 2014. Key indicators had been improving significantly since about 2013 and, at the outset of the COVID-19 outbreak in early 2020, the country had reached a much better position in which unemployment was low, there was a balanced government budget, government bonds had a stable investment rating and net immigration was positive. The developments after the end of the programme benefited, on the demand side, from a benign external economic environment, low interest rates and a boom in tourism. The economy’s capacity to take advantage of these factors was decisively improved, on the supply side, by structural reforms, spurred mainly by the implementation of the EU/IMF programme and previous action. The pursuit of structural reforms boosted the skill level and export orientation of the economy. Financial stability improved through the recapitalisation of the banking sector and by addressing non-performing loans. Fiscal consolidation continued throughout the post-programme period but was focused on the headline deficit with only limited structural improvement, mostly relying on historically low interest rates and subdued public investment. EU membership helped Portugal in overcoming the adjustment crisis with the single market, cohesion policy and the euro. European economic surveillance gave guidance and set a solid policy framework which also had positive signalling effects to financial markets. This paper does not address the impact of the COVID-19 pandemic and Portugal’s reaction to it. It rather aims to show how a country that had been under an adjustment programme recovered from a severe crisis and which structural challenges remain. Macroeconomic vulnerabilities due to decreasing but still high public and private debt, a lack of convergence to the EU average income, low productivity levels, and unfavourable demographic trends will influence how the country manages the green and digital transitions and copes with the COVID-19 crisis.
    Keywords: Weise, Portugal’s performance since the crisis, adjustment programme, consolidation, migration, Portugal, structural reforms.
    JEL: E61 E65 H62
    Date: 2020–09
  5. By: Economides, George; Papageorgiou, Dmitris; Philippopoulos, Apostolis
    Abstract: This paper studies the Greek economy in the aftermath of the 2007-8 global crisis looking for barriers to, and engines of, growth. We use a micro-founded macroeconomic model calibrated to Greece. We first study the years of the debt crisis between 2008 and 2016 and then the recent covid-19 pandemic. Departing from 2008, our simulations show that the adopted economic adjustment program (the fiscal austerity mix combined with the fiscal and monetary assistance provided by the EU, ECB and IMF), jointly with the observed deterioration in institutional quality (the degree of protection of property rights) can explain most (around 23% of GDP) of the cumulative loss in GDP in the data (around 26% of GDP) between 2008 and 2016. In particular, the economic adjustment program can explain a fall of around 13%, while the deterioration in property rights accounts for another 10%. Counterfactual simulations, on the other hand, show that this loss could have been around 10% only, if the country had followed a different fiscal policy mix; if the degree of product marker liberalization was closer to that in the core euro zone countries; and, above all, if institutional quality in Greece had simply remained at its pre-crisis level. On the other hand, we show that, in the absence of the offcial fiscal bailouts, the depression would be much deeper, while the accommodative role played by the quantitative policies of the ECB has been vital to the Greek economy. Finally, departing from 2019, we quantify the impact of the covid-19 pandemic under various policy scenaria. A loss of around 8:5% of GDP and a sharp jump of public debt seem to be unavoidable during 2020 but, like in the case of the debt crisis, the duration of the new crisis depends crucially on the policy mix chosen.
    Keywords: growth; macroeconomic policy; institutions
    JEL: O40 H60
    Date: 2020–08–31
  6. By: Monastiriotis, Vassilis; Tunali, Cigdem Borke
    Abstract: The issue of external imbalances has become a key concern in the global economy, gaining particular prominence also inside Europe, following the Eurozone crisis. Comparatively, however, evidence for the European periphery is much less developed. In this study we investigate the sustainability of external imbalances in 15 countries from the EU’s so-called eastern and super-periphery across a range of sustainability tests. We find that external imbalances are, on the whole, large and, despite some significant adjustments in the post-crisis period, they continue to follow paths that are possibly unsustainable. Our results show a higher likelihood of confirming sustainability when looking separately at the current account and the net foreign asset position than when looking jointly at the current and capital accounts (and thus at the intertemporal budget constraint – Bohn J Monet Econ 54(7):1837–1847, 2007). This suggests, albeit tentatively, problems and vulnerabilities that go beyond simple concerns about price competitiveness and the trade performance of the countries under study.
    Keywords: external imbalances; current account sustainability; European periphery; error correction
    JEL: F32 F41
    Date: 2020–04–01
  7. By: Ioanna Avgeri (Athens University of Economics and Business); Yiannis Dendramis (Athens University of Economics and Business); Helen Louri (Athens University of Economics and Business and London School of Economics)
    Abstract: The scope of this paper is to examine if and how the establishment of the Single Supervisory Mechanism (SSM) influenced the profitability of European banks. To do so, we employ the returns on assets and equity as alternative indicators for profitability. Using data for 344 European banks in 2011-2017 we apply the difference-in-differences methodology combined with matching techniques. Our main findings indicate a statistically significant and positive effect on profitability for the directly supervised banks, especially banks located in the periphery of the euro area, implying that institutional improvements introduced by the SSM were beneficial not only for strengthening stability and increasing credibility but also for improving performance and enhancing integration.
    Keywords: European Banking Union; SSM; Bank profitability; policy evaluation
    JEL: C23 C51 G21
    Date: 2020–11
  8. By: Checherita-Westphal, Cristina; Domingues Semeano, João
    Abstract: The interest rate-growth differential ( JEL Classification: E43, E62, H63, H68, G1
    Keywords: fiscal sustainability, government debt, income catch-up, interest-rate-growth differential, interest rates
    Date: 2020–11
  9. By: Olesya Grishchenko (Division of Monetary Affairs, Federal Reserve Board); Franck Moraux (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes); Olga Pakulyak (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes)
    Abstract: We construct the French nominal yield curve using Svensson33 methodology and all available public data of French nominal government debt securities—Obligations Assimilables du Trésor (OATs). Our sample period starts in October 1987 and ends in April 2018. We find that the functioning of the French sovereign bond market has improved dramatically following the onset of the euro area and has been functioning reasonably well since then, with the exceptions of the Global Financial Crisis period and the European sovereign crisis period. We also find that, the French nominal on-the-run securities have, on average, a negligible liquidity premium, in sharp contrast to the U.S. nominal Treasury market, where such a premium is sizable. On average, the level and the slope of the French zero-coupon rates have been decreasing since the Global Financial Crisis.
    Keywords: French nominal government bonds,Term structure of French interest rates,OATs,Yield curve,Svensson model,On-the-run premium,Sovereign spread,Predictability
    Date: 2020–11
  10. By: Feld, Lars P.; Wieland, Volker
    Abstract: The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. The authors shows how a regular proportionality check could be integrated in the ECB's strategy that is currently undergoing a systematic review. In particular, they propose to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided
    Keywords: central bank independence,monetary law,monetary institutions,monetary policy strategy,proportionality,policy rules,quantitative easing
    JEL: E52 E58 K10
    Date: 2020
  11. By: Bulfone, Fabio
    Abstract: The Great Recession renewed calls for a return of state activism in support of the European economy. The widespread nationalization of ailing companies and the growing activism of national development banks led many to celebrate the reappearance of industrial policy. By reviewing the evolution of the goals, protagonists, and policy instruments of industrial policy since the postwar period, this paper shows how state intervention never ceased to be a crucial engine of growth across the EU. It argues that the decline of the Fordist wage-led production regime marked a turning point in the political economy of industrial policy with the transition from inward-looking to open-market forms of state intervention. The main features of open-market industrial policy are then discussed referring to the cases of the internationalization of national champions in public service sectors and the proliferation across the EU of industrial clusters. Finally, the paper reviews postcrisis instances of state intervention and highlights how, rather than breaking with past tendencies, the Great Recession further accelerated the shift towards open-market industrial policy.
    Keywords: comparative capitalism,European integration,Germany,industrial policy,national development banks,Deutschland,europäische Integration,Industriepolitik,staatliche Entwicklungsbanken,vergleichende Kapitalismusforschung
    Date: 2020
  12. By: Eric McCoy
    Abstract: In the aftermath of the Global Financial Crisis (GFC), central bank policy rates edged closer to their effective lower bound – the point beyond which central banks cannot or do not want to lower rates further due to economic reasons or institutional constraints. Central banks therefore had to move beyond conventional policy instruments and instead resort to using unconventional tools such as large-scale asset purchase programs. With policy rates stuck at their effective lower bound for an extended period of time, central bankers and academics started to investigate the channels linking central bank unconventional monetary policy decisions to exchange rate movements. As will be discussed in this paper, extracting the expected policy rate and the term premium components of interest rates using a term structure model contributes to a better understanding of the channels through which the introduction of unconventional monetary policy measures have affected the dynamics of the euro – US dollar (EUR/USD) exchange rate. Empirical evidence is presented showing that the term premium component started to play a predominant role in anchoring EUR/USD developments to unconventional monetary policy, which first began in the US with the US Federal Reserve’s (Fed) QE1 in 2008 and which was later followed in the euro area by the onset of the ECB’s large-scale asset purchase program (APP) in 2015. The ECB’s APP, by compressing the term premium component, has likely triggered portfolio rebalancing and the ensuing cross-border capital flows have exerted a downwards pressure on the EUR/USD. Last but not least, the paper also presents empirical evidence demonstrating that incorporating non-monetary policy variables (relative stock market performance, a measure of domestic sovereign credit risk, as well as relative long-term inflation expectations and oil prices) into the analytical framework enhances significantly the understanding and analysis of EUR/USD developments.
    Keywords: Monetary Policy, Term Premia, Financial Markets, Exchange Rates, McCoy.
    JEL: E43 E44 E52 E58 F31
    Date: 2020–07
  13. By: Myrto Oikonomou
    Abstract: Uncertainty indexes spiked in the aftermath of the Brexit referendum, and remained elevated ever since. This paper studies the consequences of the Brexit-induced uncertainty on trade and labor market outcomes. We consider two scenarios that can resolve the uncertainty over the trade regime. The first is the World Trade Organization agreement, whereby the United Kingdom would receive the Most Favored Nation clauses from the European Union, face a substantial increase in trade barriers, and regain full control on immigration policies. The second scenario is a Norway-like arrangement, which corresponds to a minimal increase in trade barriers but no changes in labor market policies. The new status quo will determine the long-run level of output and employment after the Brexit transition is complete. The interplay between frictions in the goods and labor market generates a strong amplification mechanism for the propagation of Brexit-related uncertainty and brings the effects of Brexit on labor market variables to the front of the debate.
    Date: 2020–11–06
  14. By: Mengheng Li (Economics Discipline Group, University of Technology Sydney, Australia); Ivan Mendieta-Muñoz (Department of Economics, University of Utah, USA)
    Abstract: Abstract This paper studies the evolution of long-run growth rates in the G-7 countries. We identify a measure of long-run output growth rate with that rate of growth consistent with a constant unemployment rate. The methodology proposed also allows the derivation of the long-run growth rate associated with technical progress by separating the effects derived from movements in the rate of growth of the labour force. To measure its trajectories during the postwar period, we use time-varying parameter models that incorporate both stochastic volatility and a Heckman-type two-step estimation procedure that deals with the possible endogeneity problem in the econometric models. Our results show a significant decline in long-run growth rates that is not associated with the detrimental effects of the Great Recession, and that the rate of growth of technical progress appears to be behind the slowdown in long-run GDP growth. JEL Classification: O41, O47, C15, C32.
    Keywords: Secular stagnation, long-run output growth rates, long-run technical progress growth rates, time-varying parameter models with stochastic volatility, Heckman two-step bias correction; Secular stagnation, long-run output growth rates, long-run technical progress growth rates, time-varying parameter models with stochastic volatility, Heckman two-step bias correction
    JEL: C O
    Date: 2019

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