nep-eec New Economics Papers
on European Economics
Issue of 2020‒11‒23
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion? By Aymeric Ortmans; Fabien Tripier
  2. Close Encounters of the European Kind: Economic Integration, Sectoral Heterogeneity and Structural Reforms By Jan-Egbert Sturm; Vera Eichenauer; Nauro Campos
  3. Modelling Loans to Non-Financial Corporations within the Eurozone: A Long-Memory Approach By Guglielmo Maria Caporale; Luis A. Gil-Alana
  4. The Phillips Curve at the ECB By Eser, Fabian; Lane, Philip; Moretti, Laura; Osbat, Chiara; Karadi, Peter
  5. Public finances and Public Private Partnerships in the European Union By Cepparulo, Alessandra; Eusepi, Giuseppe; Giuriato, Luisa
  6. Do EU Fiscal Rules Support or Hinder Counter-Cyclical Fiscal Policy? By Martin Larch; Eloïse Orseau; Wouter van der Wielen
  7. How Loose, how tight? A measure of monetary and fiscal stance for the euro area. By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  8. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  9. Brexit Uncertainty and its (Dis)Service Effects By Saad Ahmad; Nuno Limão; Sarah Oliver; Serge Shikher
  10. Local Government Fiscal Regulation in the EU: The Impact of Balanced Budget Rules By Jochimsen, Beate; Raffer, Christian
  11. Tracing the impact of the ECB's asset purchase programme on the yield curve By Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Vladu, Andreea
  12. Modeling extreme events: time-varying extreme tail shape By Bernd Schwaab; Xin Zhang; Andre Lucas
  13. Persistence and Long Memory in Monetary Policy Spreads By Guglielmo Maria Caporale; Luis A. Gil-Alana
  14. Learning from Forecast Errors: A New Approach to Forecast Combinations By Tae-Hwy Lee; Ekaterina Seregina
  15. How to not miss a productivity revival once again? By Bart van Ark; Klaas de Vries; Abdul Erumban
  16. MULTIPRIL, a new database on multilateral price levels and currency misalignments By Cécile Couharde; Carl Grekou; Valérie Mignon

  1. By: Aymeric Ortmans; Fabien Tripier
    Abstract: This paper studies how the announcement of ECB’s monetary policies has stopped the contagion of the COVID-19 pandemic in the European sovereign debt markets. We show that up to March 9, the occurence of new cases in euro area countries has a sizeable and persistent effect on 10-years sovereign bond spreads relative to Germany: the occurrence of 1000 new cases is accompanied by an immediate increase in the spread which lasts 5 days after, reaching an increase of 0.54 percentage point. Afterwards, the effect is close to zero and not significant. We interpret this change as a successful outcome of the ECB’s press conference on March 12 despite the ”we are not here to close spreads” controversy. Indeed, a counterfactual shows that without this shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18, when the ECB’s Pandemic Emergency Purchase Programme has finally been announced.
    Keywords: COVID-19;European Central Bank;Sovereign debt;Monetary policy;Local projections
    JEL: E52 E58 E65 H63
    Date: 2020–10
  2. By: Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Vera Eichenauer (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Nauro Campos (University College London, London, UK)
    Abstract: This paper addresses two main questions: (a) Has European integration hindered the implementation of labour, financial and product market structural reforms? (b) Do the effects of these reforms vary more across sectors than across countries? Using more granular reform measures, longer time windows and a larger sample of countries than previous studies, we confirm that the euro triggered product but neither labour nor financial market reforms. Differently from previous studies, we find that: (a) the Single Market has similar effects to the euro, and (b) sectoral heterogeneity appears less important in explaining the economic impacts of reforms than country heterogeneity.
    Keywords: European integration, structural reforms, Single Market, Euro, sectoral heterogeneity
    JEL: F4 N1 N4
    Date: 2020–06
  3. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper uses fractional integration and cointegration methods to analyse the determinants of the amount of loans provided to non-financial corporations (NFCs) during the last three decades in four Eurozone countries, namely Germany, France, Italy and Spain. More specifically, ARFIMA (AutoRegressive Fractionally Integrated Moving Average) and FCVAR (Fractionally Cointegrated Vector Autoregression) models are estimated and then forecasts are also produced. All series are found to be highly persistent and long-run equilibrium relationships between them are also identified, confirming the role of real GDP and real gross investment as determinants of loans to NFCs. The forecasting accuracy of the FCVAR was also assessed by comparing it to that of the ARFIMA specifications, and the former were found to outperform the latter in all cases.
    Keywords: non-financial corporations, loans, Eurozone, long-memory, fractional integration and cointegration
    JEL: C22 C32 C51 H81
    Date: 2020
  4. By: Eser, Fabian; Lane, Philip; Moretti, Laura; Osbat, Chiara; Karadi, Peter
    Abstract: We explain the role of the Phillips Curve at the ECB in the analysis of the economic outlook and the formulation of monetary policy. First, revisiting the structural Phillips Curve, we highlight the challenges in recovering structural parameters from reduced-form estimates and relate the reduced-form Phillips Curve to (semi-)structural models used at the ECB for policy analysis. Second, we identify the slope of the structural Phillips Curve following two approaches: one that exploits cross-country variation and the other using high-frequency monetary policy surprises as external instruments. Third, we present reduced-form evidence based on thick-modelling and dynamic model averaging techniques, focusing on the relation between slack and in ation and the role of in ation expectations. In relation to the recent weakness of in ation, we discuss the role of firm profits in the pass-through from wages to prices and the contribution of external factors. Overall, the available evidence supports the view that the absorption of slack and a firm anchoring of in ation expectations remain central to successful in ation stabilisation.
    Keywords: Inflation,Phillips Curve,Monetary Policy,European Central Bank
    JEL: E31 E52
    Date: 2020
  5. By: Cepparulo, Alessandra; Eusepi, Giuseppe; Giuriato, Luisa
    Abstract: We analyse the Public Private Partnerships (PPPs) in order to account for their uneven distribution among the European Union countries and to identify the motivations of the public actor in selecting PPPs. We focus on the fiscal incentives to overcome budget and borrowing constraints, taking also into account of the political features and institutional frameworks of the countries. Using IMF data over the years 1990-2015, we confirm that the state of public finances impacts on the government’s choice of PPPs: financially constrained governments find the PPP option more attractive due to the possibility of off-balance accounting, while high-debt countries reduce the private investors’ interest in PPP. Fiscal rules increased the PPP bias in the pre-crisis period, while the post-crisis reforms and the increased surveillance seem to better discipline PPP employment. PPPs are, also, confirmed to be under the influence of political competition and government’s preferences for current expenditures.
    Keywords: PPPs,fiscal incentives, fiscal rules, political competition, EU
    JEL: H00 H11 H54 H62 H63
    Date: 2020
  6. By: Martin Larch; Eloïse Orseau; Wouter van der Wielen
    Abstract: Rather than stabilising aggregate demand, discretionary fiscal policy tends to amplify cyclical fluctuations of output. The commonly accepted reasons are political economy and uncertainty. In the EU, the pro-cyclical nature of discretionary fiscal policy has also been associated with the commonly agreed fiscal rules, which, for some observers, unduly limit the scope for stabilising output. Using panel data covering close to 40 EU and non-EU countries, we provide evidence that the volatility of output gap estimates is not a convincing explanation for pro-cyclical policies. With the exception of very large shocks, discretionary measures remain ill-timed from a stabilisation perspective even when observable and politically more meaningful indicators of the cycle are used. We also show that deviations from fiscal rules and the accumulation of government debt foster pro-cyclical fiscal policy. Lawmakers can run discretionary fiscal policy measures based on political economy considerations up to a point. Once debt grows too high, the leeway to stabilise output with discretionary fiscal policy measures fades. Complying with fiscal rules that limit the increase in government debt or keep a steady course in the face of cyclical fluctuation is conducive to counter-cyclical fiscal policy making.
    Keywords: fiscal policy, fiscal rules, fiscal stabilisation, counter-cyclical policy, dynamic panel models.
    JEL: C23 E61 E62 H30 H62
    Date: 2020
  7. By: Nicoletta Batini (International Monetary Fund); Alessandro Cantelmo (Bank of Italy); Giovanni Melina (International Monetary Fund); Stefania Villa (Bank of Italy)
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint monetary and fiscal policy stance in the euro area (EA) and its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models also featuring financial intermediaries and long-term government debt. The analysis highlights the short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left as the 'only game in town' after 2013. Individual countries' DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at EA level, due to the different fiscal stances.
    Keywords: policy stance, euro area, monetary policy, fiscal policy.
    JEL: E4 E5 E6
    Date: 2020–09
  8. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital ows receded significantly in the aftermath of the global financial crisis, portfolio ows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis "second phase of global liquidity" (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher global investment fund in ows to euro area equities and debt. These in ows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance in the euro area. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
    Keywords: Monetary policy,international spillovers,capital ows,investment funds
    JEL: F32 F42 G11 G15
    Date: 2020
  9. By: Saad Ahmad; Nuno Limão; Sarah Oliver; Serge Shikher
    Abstract: We estimate the impact of increased policy uncertainty from Brexit on UK trade in services. We apply an uncertainty-augmented gravity equation to UK services trade with the European Union at the industry level from 2016Q1 to 2018Q4. By exploiting the variation in the probability of Brexit from prediction markets interacted with a new trade policy risk measure across service industries we identify a significant negative impact of the threat of Brexit on trade values and participation. The increased probability of Brexit in this period lowered services exports by at least 20 log points.
    JEL: F02 F13 F14 L8
    Date: 2020–11
  10. By: Jochimsen, Beate; Raffer, Christian
    Abstract: In the past decades many European countries implemented numerical fiscal rules in order to strengthen fiscal discipline on all levels of government. This development was intensified by the financial crisis in 2008. Although plenty of research points to the discipline-enhancing effect of these rules on the national level, comparably little is known about their impact on local governments. This is even truer when it comes to the effect of specific rules like the so-called Balanced Budget Rule (BBR). With this contribution, we shed some light on the question if BBRs are an effective instrument to put local government budget balances on a sound footing. We estimate a dynamic fiscal reaction function within a LSDVC framework using a panel of 19 European countries over a period of 19 years (1997-2015). Although a potential endogeneity bias cannot be fully ruled out, the results suggest a discipline enhancing effect of BBRs over a range of different specifications. Other fiscal rules seem to be less important. Disentangling the effect of the mere existence of a BBR from its institutional implementation reveals that there is no significant effect for simply making a BBR part of an intergovernmental fiscal framework; what counts is its proper implementation in terms of characteristics like regulatory embeddedness, monitoring, enforcement, and media visibility.
    JEL: H62 H72 H83
    Date: 2020
  11. By: Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Vladu, Andreea
    Abstract: We trace the impact of the European Central Bank (ECB) asset purchase programme (APP) on the yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the "free-float of duration risk" borne by pricesensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by almost one percentage point. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases has a significant impact on term premia.
    Keywords: Term structure of interest rates,term premia,central bank asset purchases,monetary policy,European Central Bank
    JEL: C5 E43 E52 E58 G12
    Date: 2020
  12. By: Bernd Schwaab (European Central Bank); Xin Zhang (Sveriges Riksbank); Andre Lucas (Vrije Universiteit Amsterdam)
    Abstract: A dynamic semi-parametric framework is proposed to study time variation in tail fatness of sovereign bond yield changes during the 2010--2012 euro area sovereign debt crisis measured at a high (15-minute) frequency. The framework builds on the Generalized Pareto Distribution (GPD) for modeling peaks over thresholds as in Extreme Value Theory, but casts the model in a conditional framework to allow for time-variation in the tail shape parameters. The score-driven updates used improve the expected Kullback-Leibler divergence between the model and the true data generating process on every step even if the GPD only fits approximately and the model is mis-sepcified, as will be the case in any finite sample. This is confirmed in simulations. Using the model, we find the ECB program had a beneficial impact on extreme upper tail quantiles, leaning against the risk of extremely adverse market outcomes while active.
    Keywords: dynamic tail risk, observation-driven models, extreme value theory, European Central Bank (ECB), Securities Markets Programme (SMP)
    JEL: C22 G11
    Date: 2020–11–10
  13. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: The overnight money market rate is a key monetary policy tool. In recent years, central banks worldwide have developed new monetary policy strategies aimed at keeping its deviations from the policy rate small and short-lived. This paper describes the main instruments used for this purpose by the US Fed, the ECB and the BoE and also their policy responses to the Great Financial Crisis (GFC). Fractional integration and long-memory methods are then applied to investigate how those affected the persistence of policy spreads (i.e., the difference between overnight rates and policy rates) during different sub-periods. It is found that this increased sharply during the GFC but has fallen back in recent years. In the case of the ECB the introduction of the new €-STR benchmark in particular appears to have made monetary policy more effective.
    Keywords: interest rates, persistence, central banks, long memory, fractional integration
    JEL: C22 E52
    Date: 2020
  14. By: Tae-Hwy Lee; Ekaterina Seregina
    Abstract: This paper studies forecast combination (as an expert system) using the precision matrix estimation of forecast errors when the latter admit the approximate factor model. This approach incorporates the facts that experts often use common sets of information and hence they tend to make common mistakes. This premise is evidenced in many empirical results. For example, the European Central Bank's Survey of Professional Forecasters on Euro-area real GDP growth demonstrates that the professional forecasters tend to jointly understate or overstate GDP growth. Motivated by this stylized fact, we develop a novel framework which exploits the factor structure of forecast errors and the sparsity in the precision matrix of the idiosyncratic components of the forecast errors. The proposed algorithm is called Factor Graphical Model (FGM). Our approach overcomes the challenge of obtaining the forecasts that contain unique information, which was shown to be necessary to achieve a "winning" forecast combination. In simulation, we demonstrate the merits of the FGM in comparison with the equal-weighted forecasts and the standard graphical methods in the literature. An empirical application to forecasting macroeconomic time series in big data environment highlights the advantage of the FGM approach in comparison with the existing methods of forecast combination.
    Date: 2020–11
  15. By: Bart van Ark; Klaas de Vries; Abdul Erumban
    Abstract: Over the past 15 years productivity growth in advanced economies has significantly slowed, giving rise to the productivity paradox of the New Digital Economy – that is, the notion of increased business spending on ICT assets and digital services without a noticeable increase in productivity. We argue that time lags are the most important reason for the slow emergence of the productivity effects from digital transformation. This paper provides evidence that underneath the slowing productivity growth rates at the macro level, signs of structural improvements can be detected. In the US most of the positive contribution to productivity growth is coming from the digital producing sector. The Euro Area and the UK show larger productivity contributions from the most intensive digital-using sectors, although the UK also had a fairly large number of less intensive digital-using industries which showed productivity declines. We also find that increases in innovation competencies of the workforce are concentrated in industries showing faster growth in labour productivity, even though more research is needed to identify causality. Finally, we speculate that as the recovery from the COVID-19 recession gets underway the potential for significant productivity gains in the medium term is larger than during the past fifteen years.
    Keywords: Production, Cost, Capital, Multifactor and Total Factor Productivity, Capacity, Measurement of Economic Growth, Aggregate Productivity
    JEL: D24 O47
    Date: 2020–11
  16. By: Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: This paper describes the new CEPII-MULTIPRIL database on Multilateral Price Levels (MPL) introduced in 2020. The MULTIPRIL database covers a wide sample of 178 countries over the 1990-2018 period, and includes relative price level series computed vis-à-vis two sets of trading partners (177 and the top 30) according to three different trade-weighting schemes. It also contains MPL-based currency misalignments series for 156 countries over the 1991-2018 period. MULTIPRIL offers the potential to improve the coverage and quality of worldwide price-competitiveness comparisons. By focusing on price level data, it usefully complements the EQCHANGE database on equilibrium exchange rates and currency misalignments derived from series in indices. Its multilateral setting provides a more comprehensive picture of relative price levels and currency misalignments compared to existing bilateral measures.
    Keywords: Multilateral price levels;Equilibrium exchange rates;Currency misalignments;Bayesian Model Averaging
    JEL: F31 C32 C82
    Date: 2020–10

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