nep-eec New Economics Papers
on European Economics
Issue of 2020‒11‒30
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Is there a euro effect in the drivers of US FDI? New evidence using Bayesian Model Averaging techniques By Mariam Camarero; Sergi Moliner; Cecilio Tamarit
  2. Liquidity in resolution: estimating possible liquidity gaps for specific banks in resolution and in a systemic crisis By Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
  3. Has bail-in increased market discipline? An empirical investigation of European banks’ credit spreads By Lindstrom, Ryan; Osborne, Matthew
  4. Asymmetric Macroeconomic Stabilization And Fiscal Consolidation In The Oecd And The Euro Area By ​pierre Aldama; Jérôme Creel
  5. Income inequality and monetary policy in the Euro Area By Jérôme Creel; Mehdi El Herradi
  6. Switching Volatility in a Nonlinear Open Economy By Jonathan Benchimol; Sergey Ivashchenko
  7. A MODEL OF PARALLEL CURRENCIES UNDER FREE FLOATING EXCHANGE RATES By Castañeda, Juan; Damrich, Sebastian; Schwartz, Pedro
  8. Reforms of Collective Bargaining Institutions in European Union Countries: Bad Timing, Bad Outcomes? By Yann Thommen
  9. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  10. Retrenchment of euro area banks and international banking models By Rodriguez-Moreno, Maria; Argimón, Isabel; Ortiz, Elena Fernández
  11. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
  12. Brexit and trade on the island of Ireland By Martina Lawless
  13. Bargaining power and the Phillips curve: a micro-macro analysis By Marco Jacopo Lombardi; Marianna Riggi; Eliana Viviano
  14. Credit, banking fragility and economic performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  15. Which Firms Benefit from Corporate QE during the COVID-19 Crisis? : The Case of the ECB’s Pandemic Emergency Purchase Program By Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry
  16. Setting New Priorities for the ECB’s Mandate By Christophe Blot; Jérôme Creel; Emmanuelle Faure; Paul Hubert
  17. Macroeconomic forecasting in the euro area using predictive combinations of DSGE models By Jan Capek; Jesus Crespo Cuaresma; Niko Hauzenberger; Vlastimil Reichel
  18. Taxation Systems in the EU: The Role of Economic Integration and Global Financial Crisis By Kazim Okan Erol
  19. COVID-Town: An Integrated Economic-Epidemiological Agent-Based Model By Patrick Mellacher

  1. By: Mariam Camarero (INTECO & Department of Economics, Universitat Jaume I, Castellón, Spain); Sergi Moliner (INTECO & Department of Economics, Universitat Jaume I, Castellón, Spain); Cecilio Tamarit (INTECO & Department of Applied Economics II, University of Valencia, Spain)
    Abstract: In this paper we analyze the potential determinants of US outward FDI stock with a particular focus on the euro effect during the period 1985-2016. To this aim, we consider a large set of candidate variables based on the theory as well as on previous empirical analysis. We select the covariates using a data-driven methodology, the Bayesian Model Averaging (BMA) analysis. Our sample includes a total of 51 host countries, that represents the 70% of US outward FDI stock. We study the role of the euro on American FDI patterns both in Europe and the rest of the world. Within Europe, we consider the European Union (EU) and the Euro Area (EA), and core and periphery within the EA. Although we conclude that US FDI is explained by both horizontal and vertical motives, we find that HFDI strategies predominate in EA core countries, whereas VFDI prevails in the EA periphery.
    Keywords: FDI determinants; Foreign Direct Investment; US; European Union; Euro area; Bayesian Model Averaging; Variable selection
    JEL: F21 F23 C11 C52
    Date: 2020
  2. By: Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
    Abstract: This paper contributes to the debate on liquidity in resolution by providing a quantitative assessment of liquidity gaps of banks in resolution in the euro area. It estimates possible ranges of liquidity gaps for significant banks under different assumptions and scenarios. The findings suggest that, while the average liquidity gaps in resolution are limited, the averages hide significant outliers. The paper thus shows that, under adverse circumstances, the instruments currently available to provide liquidity support to financial institutions in the euro area would be insufficient JEL Classification: G01, G21, G28, G33, C63
    Keywords: bank runs, contagion, Liquidity, Monte Carlo simulations, resolution, systemic crisis
    Date: 2020–11
  3. By: Lindstrom, Ryan (Bank of England); Osborne, Matthew (Bank of England)
    Abstract: Following the banking sector stress events of 2008–09 and 2011–12, a new framework for resolving failing banks has been implemented in the European Union which aims to facilitate authorities imposing losses on private creditors. The new framework implements global standards requiring banks to maintain a minimum quantum of loss-absorbing (or ‘bail-in’) bonds. Using data on the credit spreads on large European banks’ bonds between 2010 and 2019, we provide evidence that the risk sensitivity of banks’ credit spreads has increased since the reforms, and that the level and risk sensitivity of spreads on senior bail-in bonds are higher than those of comparable non-bail-in bonds. These findings support the hypothesis that the reforms have increased investors’ perception of the likelihood that they will be bailed in. These results hold for both UK and euro-area banks, though they are somewhat weaker for periphery European banks. We show that the degree of progress a bank has made in issuing bail-in bonds is positively related to the level and risk sensitivity of such bonds. We show that the higher level and risk sensitivity of spreads on bail-in bonds are largely invariant to whether bail-in bonds are contractually subordinated (ie issued as non-preferred senior) or structurally subordinated (ie issued from the holding company), and the effects are also unaffected by whether or not a bank is classified as a global systemically important bank (G-SIB). Finally, we show that the results are robust to changes in the strategy or risk profile of individual banks, via the inclusion of time-varying bank-specific effects.
    Keywords: Banks; bank resolution; financial stability; bail-in
    JEL: G21 G28 G33
    Date: 2020–11–06
  4. By: ​pierre Aldama (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques)
    Abstract: This paper presents empirical evidence of asymmetric fiscal policy along the business cycle, using a real-time panel data on 19 OECD countries. We estimate various specifications of fiscal policy rules, in which ex ante fiscal policy has two major objectives: macroeconomic stabilization and fiscal consolidation. First, we find that a symmetric fiscal policy rule may not be an accurate representation of real-time fiscal policy. We find evidence in favor of asymmetric fiscal policy, in particular regarding the response to output gap. Second, fiscal policy appears to be generally procyclical in downturns and a-cyclical in upturns, typically in the Euro Area and during the crisis. Third, we do not find significant evidence of a procyclical fiscal consolidation in the OECD and the Euro Area, although surplus-debt feedback coefficients are generally larger in downturns. Our results are robust to an alternative measure of business cycle and to country exclusion.
    Keywords: Fiscal policy rules; Real-time data; Asymmetric stabilization; Fiscal consolidation
    JEL: E61 E62 H6
    Date: 2020–03
  5. By: Jérôme Creel (Observatoire français des conjonctures économiques); Mehdi El Herradi (Université Bordeaux Montaigne)
    Abstract: This paper examines the distributional implications of monetary policy, either standard, non-standard or both, on income inequality in 10 Euro Area countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. The identification of monetary shocks follows a one-step procedure and relies only on country-specific determinants of income distribution. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in countries with a high level of market inequalities, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality. Results are robust to alternative data sources either for income distribution or for non-standard monetary policies.
    Keywords: Euro Area; Monetary policy; Income distribution; Panel VAR
    JEL: E62 E64 D63
    Date: 2020–06
  6. By: Jonathan Benchimol (Bank of Israel, Jerusalem, Israel); Sergey Ivashchenko (Russian Academy of Sciences (IREP), Financial Research Institute, and Saint-Petersburg State University, Saint Petersburg, Russia)
    Abstract: Uncertainty about an economy's regime can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how US shocks from both the real economy and financial markets affected the euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy, should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers.
    Keywords: DSGE, Volatility Shocks, Markov Switching, Open Economy, Financial Crisis, Nonlinearities
    JEL: C61 E32 F41
    Date: 2020–11
  7. By: Castañeda, Juan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Damrich, Sebastian (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Schwartz, Pedro (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The production of good money seems to be out of reach for most countries. The aim of this paper is to examine how a country can attain monetary stability by granting legal tender to two freely tradable currencies circulating in parallel. Then we examine how such a system of parallel currencies could be used for any Member State of the Eurozone, with both the euro and a national currency accepted as legal tender, which we argue is a desirable monetary arrangement particularly but not only in times of crisis. The necessary condition for this parallel system to function properly is confidence in the good behaviour of the monetary authorities in charge of each currency. A fully floating exchange rate between the two would keep the issuers of the new local currency in check. This bottom-up solution based on currency choice could also be applied in countries aspiring to enter the Eurozone, instead of the top-down once and for all imposition of the euro as a single currency that has turned out to be very stringent and has shown institutional flaws during the recent Eurozone crisis of 2009 – 2013. Our scheme would have alleviated the plight of Greece and Cyprus. It could also ease the entry of the eight Member States still missing from the Eurozone.
    Keywords: Parallel currency system; monetary competition; inverse Gresham law; Eurozone
    Date: 2020–06
  8. By: Yann Thommen
    Abstract: This paper investigates whether flexibility-enhancing reforms of national collective bargaining systems have positive outcomes in terms of employment and unemployment in the short-term, especially when implemented during an economic downturn. The analysis consists in applying local projections to a novel panel database of reforms of collective bargaining institutions in EU countries in the period 2000-2018. There is no evidence that making collective bargaining institutions more flexible during a recession has a positive effect on employment or unemployment in the short term. More specifically, reforms that reduce bargaining coverage have negative short-term effects, particularly on the employment of young people and low-educated workers, and are associated with a decline in the share of temporary jobs. The results do not support the idea that collective bargaining institutions should be reformed during a recession to boost employment.
    Keywords: Employment, Unemployment, Short-term effects, Labor market, Collective bargaining, Reforms.
    JEL: E24 E32 J08 J21 J5
    Date: 2020
  9. 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 flows receded significantly in the aftermath of the global financial crisis, portfolio flows 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 investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. 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. JEL Classification: F32, F42, G15, G23
    Keywords: capital flows, international spillovers, monetary policy, non-bank financial intermediation
    Date: 2020–11
  10. By: Rodriguez-Moreno, Maria; Argimón, Isabel; Ortiz, Elena Fernández
    Abstract: In this paper, we analyze the importance of international banking models, along the operational and the funding dimensions, for the decline in international positions of European banks since the crisis. Using BIS Consolidated Banking Statistics, we find that the multinational model (higher reliance on local activity) and the decentralized model (higher weight of local funding over local claims) is associated with lower retrenchment. We also find that more business synchronization between the home and the host economy is associated with higher declines in lending after the crisis and that the multinational and decentralized models mitigate such effect. On the other hand, lending to banks is not affected by the correlation of economic cycles between the home and the host country. JEL Classification: F21, F23, G15, G21
    Keywords: cross-border bank lending, financial crisis, global banking, retrenchment
    Date: 2020–11
  11. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening entail the opposite effect than the intended expansionary impact in a low interest rate environment? We demonstrate that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector by using a non-linear macroeconomic model calibrated to the euro area economy. The framework suggests that the reversal interest rate is located in negative territory of around −1% per annum. The possibility of the reversal interest rate creates a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, can mitigate substantially the probability of encountering the reversal rate, improves welfare and reduces economic fluctuations. This new motive emphasizes also the strategic complementarities between monetary policy and macroprudential policy. JEL Classification: E32, E44, E52, E58, G21
    Keywords: macroprudential policy, monetary policy, negative interest rates, reversal interest rate, ZLB
    Date: 2020–11
  12. By: Martina Lawless
    Abstract: After decades of expansion and deepening integration in Europe, the referendum in the United Kingdom in June 2016 to leave the European Union was an unprecedented event. Amongst the many issues to be negotiated in unravelling membership, the withdrawal process has been dominated by the implications for the island of Ireland. Northern Ireland has been to the forefront as the location of the new border between the EU and a non-member state. While much of the focus has been on the political implications, this paper looks at the potential effects of Brexit on Ireland and Northern Ireland from an economic perspective. The current patterns of cross-border trade are examined and the potential impacts of Brexit discussed, depending on the extent to which it changes the economic relationship between the UK and EU and hence in the immediate neighbourhood of Ireland and Northern Ireland.
    Keywords: Brexit; Free trade agreements; Irish border
    Date: 2020–09
  13. By: Marco Jacopo Lombardi; Marianna Riggi; Eliana Viviano
    Abstract: We use a general equilibrium model to show that a decrease in workers' bargaining power amplifies the relative contribution to the output gap of adjustments along the extensive margin of labour utilization. This mechanism reduces the cyclical movements of marginal cost (and inflation) relative to those of the output gap. We show that the relationship between bargaining power and adjustments along the extensive margin (relative to the intensive margin) is supported by microdata. Our analysis relies on panel data from the Italian survey of industrial firms. The Bayesian estimation of the model using euro-area aggregate data covering the 1970-1990 and 1991-2016 samples confirms that the decline in workers' bargaining power has weakened the inflation-output gap relationship.
    Keywords: low inflation, bargaining power, Phillips curve
    JEL: E31 E32 J23 J60
    Date: 2020–11
  14. By: Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Drawing on European Union data, this paper investigates the hypothesis that private credit and banking sector fragility may affect economic growth. We capture banking sector fragility both with the ratio of bank capital to assets and non-performing loans. We assess the effect of these three variables on the growth rate of GDP per capita, using the Solow growth model as a guiding framework. We observe that credit has no effect on economic performance in the EU when banking fragilities are high. However, the potential fragility of the banking sector measured by the non-performing loans decreases GDP per capita.
    Keywords: Private credit; Capital to assets ratio; Non-performing loans
    JEL: G10 G21 O40
    Date: 2020
  15. By: Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry (Tilburg University, Center For Economic Research)
    Keywords: quantitative easing; equity returns; Pandemic
    Date: 2020
  16. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Emmanuelle Faure (Laboratoire Dynamiques Sociales et Recomposition des Espaces); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Beyond price stability, the EU Treaties assign to the ECB a range of secondary objectives. We investigate the linkages between price stability and these objectives to assess whether they are independent, complementary or substitutable, which is important to refine the definition of the mandate. Keeping the current mandate would not provide leeway for the ECB to reach other objectives. We propose to broaden the mandate to include employment and financial stability. Enhanced coordination should contribute to fulfilling the objectives. This document was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs.
    Keywords: ECB’s Mandate; Financial stability; Employment
    Date: 2020–06
  17. By: Jan Capek (Masaryk University); Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Niko Hauzenberger (University of Salzburg); Vlastimil Reichel (Masaryk University)
    Abstract: We provide a comprehensive assessment of the predictive ability of combinations of Dynamic Stochastic General Equilibrium (DSGE) models for GDP growth, inflation and the interest rate in the euro area. We employ a battery of static and dynamic pooling weights based on Bayesian model averaging principles, prediction pools and dynamic factor representations, and entertain eight different DSGE specifications and four prediction weighting schemes. Our results indicate that exploiting mixtures of DSGE models tends to achieve superior forecasting performance over individual specifications for both point and density forecasts. The largest improvements in the accuracy of GDP growth forecasts are achieved by the prediction pooling technique, while the results for the weighting method based on dynamic factors partly leads to improvements in the quality of inflation and interest rate predictions.
    Keywords: Forecasting, model averaging, prediction pooling, DSGE models
    JEL: E37 E47 C53
    Date: 2020–11
  18. By: Kazim Okan Erol
    Abstract: This study aims to scrutinize the change of public revenue systems of the EU-15 between 1980 and 2016. The share of consumption taxes in total tax revenues increases and this process have triggered higher tax burden on labor in most of the EU countries via indirect taxation. In this study I use panel data analysis, in order to analyze the impact of global financial crisis on depreciated tax revenues in most of the member states. Political integration and global financial crisis reduce national tax revenues and this revenue loss differs due to tax system asymmetries among member states. Although indirect taxation is an easy way of compensating revenue loss for indebted countries, this type of public finance damages stability of tax revenues in long run.
    Keywords: taxation, panel data models, economic integration, fiscal policy
    JEL: F15 H20 H30 H71 C23
    Date: 2020
  19. By: Patrick Mellacher
    Abstract: I develop a novel macroeconomic epidemiological agent-based model to study the impact of the COVID-19 pandemic under varying policy scenarios. Agents differ with regard to their profession, family status and age and interact with other agents at home, work or during leisure activities. The model allows to implement and test actually used or counterfactual policies such as closing schools or the leisure industry explicitly in the model in order to explore their impact on the spread of the virus, and their economic consequences. The model is calibrated with German statistical data on time use, demography, households, firm demography, employment, company profits and wages. I set up a baseline scenario based on the German containment policies and fit the epidemiological parameters of the simulation to the observed German death curve and an estimated infection curve of the first COVID-19 wave. My model suggests that by acting one week later, the death toll of the first wave in Germany would have been 180% higher, whereas it would have been 60% lower, if the policies had been enacted a week earlier. I finally discuss two stylized fiscal policy scenarios: procyclical (zero-deficit) and anticyclical fiscal policy. In the zero-deficit scenario a vicious circle emerges, in which the economic recession spreads from the high-interaction leisure industry to the rest of the economy. Even after eliminating the virus and lifting the restrictions, the economic recovery is incomplete. Anticyclical fiscal policy on the other hand limits the economic losses and allows for a V-shaped recovery, but does not increase the number of deaths. These results suggest that an optimal response to the pandemic aiming at containment or holding out for a vaccine combines early introduction of containment measures to keep the number of infected low with expansionary fiscal policy to keep output in lower risk sectors high.
    Date: 2020–11

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