nep-eec New Economics Papers
on European Economics
Issue of 2021‒01‒11
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Incentive compatible relationship between ERMII and Close-Cooperation in the Banking Union: The case of Bulgaria and Croatia By María J Nieto; Dalvinder Singh
  2. On the effectiveness of the European Central Bank's conventional and unconventional policies under uncertainty By Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
  3. Fiscal DSGE Model for Latvia By Ginters Buss; Patrick Gruning
  4. Why Is Europe More Equal Than the United States? By Thomas Blanchet; Lucas Chancel; Amory Gethin
  5. On Classifying the Effects of Policy Announcements on Volatility By Giampiero M. Gallo; Demetrio Lacava; Edoardo Otranto
  6. Alternative measures of underlying inflation in the euro area By Cristina Conflitti
  7. Pound for Pound Export Diversification By Anderson, James; Yoto, Yoto
  8. Zombie Credit and (Dis-)Inflation: Evidence from Europe By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
  9. Productive integration, economic recession and employment in Europe: an assessment based on vertically integrated sectors By Davide Villani; Marta Fana
  10. Wealth distribution and monetary policy By Ludmila Fadejeva; Zeynep Kantur

  1. By: María J Nieto; Dalvinder Singh
    Abstract: The ambition to expand participation in the European Banking Union was to allow the ‘outs’ to enter in to close cooperation, however, it did not include the simultaneous joining of ERM II. Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to a number of questions: What is the rationale behind the double requirement of having to simultaneously apply to become a member of the ERM II and to prepare to become a member of the Banking Union via rule based “close cooperation†mechanism of coordination between the EU non-euro area NCAs and the ECB? Does the integration of close cooperation countries' banking systems with the euro area banking systems support the decision to join ERM II and ¨opting-in¨ to the SSM? Do the existing “close cooperation†arrangements guarantee greater coordination of resource-allocating decisions on prudential supervision and improved internalization of financial stability decisions? What are the advantages of the preparation to become a full member of the euro area and the SSM (e.g. coordination of macro and micro-prudential regulation; coordination of micro-prudential supervision and bank resolution)? It is evident from the research undertaken in this paper that there are clear benefits from close cooperation for the respective Member States whose domestic currencies are already linked to the euro in view of the dominant position eurozone banks have in their respective domestic markets.
    Keywords: Banking Union, Close Cooperation, ERM II
    JEL: E02 E44 F15 G15 G21 H12 K23
    Date: 2020
  2. By: Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
    Abstract: In this paper, we investigate the effectiveness of conventional and unconventional monetary policy measures by the European Central Bank (ECB) conditional on the prevailing level of uncertainty. To obtain exogenous variation in central bank policy, we rely on high-frequency surprises in financial market data for the euro area (EA) around policy announcement dates. We trace the dynamic effects of shocks to the short-term policy rate, forward guidance and quantitative easing on several key macroeconomic and financial quantities alongside survey-based measures of expectations. For this purpose, we propose a Bayesian smooth-transition vector autoregression (ST-VAR). Our results suggest that transmission channels are impaired when uncertainty is elevated. While conventional monetary policy is less effective during such periods, and sometimes also forward guidance, quantitative easing measures seem to work comparatively well in uncertain times.
    Date: 2020–11
  3. By: Ginters Buss (Latvijas Banka); Patrick Gruning (CEFER, Lietuvos Bankas)
    Abstract: We develop a fiscal dynamic stochastic general equilibrium (DSGE) model for policy simulation and scenario analysis purposes tailored to Latvia, a small open economy in a monetary union. The fiscal sector elements comprise government investment, government consumption, government transfers that are asymmetrically directed to both optimizing and hand-to-mouth households, cyclical unemployment benefits, foreign ownership of government debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. A particular finding is that having foreign ownership of government debt generally breaks the Ricardian equivalence paradigm.
    Keywords: small open economy, fiscal policy, fiscal rules, Bayesian estimation
    JEL: E0 E2 E3 F4 H2 H3 H6
    Date: 2020–12–15
  4. By: Thomas Blanchet (PSE - Paris School of Economics, WIL - World Inequality Lab , PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Lucas Chancel; Amory Gethin (PSE - Paris School of Economics, WIL - World Inequality Lab , PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We combine all available household surveys, income tax and national accounts data in a systematic manner to produce comparable pretax and posttax income inequality series in 38 European countries between 1980 and 2017. Our estimates are consistent with macroeconomic growth rates and comparable with US Distributional National Accounts. We find that inequalities rose in most European countries since 1980 both before and after taxes, but much less than in the US. Between 1980 and 2017, the European top 1% pretax income share rose from 8% to 11% while it rose from 11% to 21% in the US. Europe's lower inequality levels are mainly explained by a more equal distribution of pretax incomes rather than by more equalizing taxes and transfers systems. "Predistribution" is found to play a much larger role in explaining Europe's relative resistance to inequality than "redistribution": it accounts for between two-thirds and
    Date: 2020–09
  5. By: Giampiero M. Gallo; Demetrio Lacava; Edoardo Otranto
    Abstract: The financial turmoil surrounding the Great Recession called for unprecedented intervention by Central Banks: unconventional policies affected various areas in the economy, including stock market volatility. In order to evaluate such effects, by including Markov Switching dynamics within a recent Multiplicative Error Model, we propose a model--based classification of the dates of a Central Bank's announcements to distinguish the cases where the announcement implies an increase or a decrease in volatility, or no effect. In detail, we propose two na\"ive classification methods, obtained as a by--product of the model estimation, which provide very similar results to those coming from a classical k--means clustering procedure. The application on four Eurozone market volatility series shows a successful classification of 144 European Central Bank announcements.
    Date: 2020–11
  6. By: Cristina Conflitti (Bank of Italy)
    Abstract: This paper proposes two measures of underlying inflation for euro area as an alternative to the Harmonized Index of Consumer Prices excluding Food and Energy. The first measure, called the Core cycle measure, is constructed by using a Phillips curve model to distinguish disaggregated prices that respond to the economic cycle (procyclical), from those which do not (acyclical). The second measure, called the Common core measure, is constructed using a factor model to remove components that are subject to large or unusual price changes, which are unlikely to be related to the underlying trend of inflation because of their idiosyncratic nature. Each measure has merits and shortcomings, suggesting that they should be taken together to assess inflation developments.
    Keywords: core inflation, disaggregate consumer prices, dynamic factor model, Phillips curve
    JEL: C32 E31 E32
    Date: 2020–12
  7. By: Anderson, James (Boston College; NBED); Yoto, Yoto (Drexel University)
    Abstract: We propose a short-run model of the extensive margin of trade and deploy it to distinguish and quantify domestic and cross-border margins. Our empirical focus is on the domestic extensive margin of trade (domestic distribution of a product) and its importance for quantifying policy and globalization effects on the international extensive margin of trade. We build a dataset that combines data on the domestic extensive margin and the standard international extensive margin. It reveals significant and intuitive variation in the domestic extensive margin across countries and over time. We quantify the extensive margin effects of European Union (EU) integration, 2008-2018, and demonstrate that these effects cannot be identified without the domestic extensive margin. We find strong and highly heterogeneous effects, both across countries and directionally.
    Keywords: Extensive Margin; Domestic Extensive Margin; Globalization; Gravity
    JEL: F13 F14 F16
    Date: 2020–12–20
  8. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
    Abstract: We show that “zombie credit”—cheap credit to impaired firms—has a disinflationary effect. By helping distressed firms to stay afloat, such credit creates excess production capacity, thereby putting downward pressure on product prices. Granular European data on inflation, firms, and banks confirm this mechanism. Industry-country pairs affected by a rise of zombie credit show lower firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. Without a rise in zombie credit, inflation in Europe would have been 0.4 percentage point higher post-2012.
    Keywords: zombie lending; undercapitalized banks; disinflation; firm productivity; eurozone
    JEL: E31 E44 G21
    Date: 2020–12–01
  9. By: Davide Villani; Marta Fana (European Commission - JRC)
    Abstract: The Covid-19 crisis has revamped the discussion about the redefinition of GVC. This paper contributes to the debate, analysing the productive relationships between European countries in four key manufacturing activities. In particular, the paper addresses two objectives. First, it maps the degree of productive integration in Europe, focusing on the generation of employment in the production of exported intermediate inputs and final goods. Second, it provides a preliminary assessment of the potential impact on employment that the current economic crisis will have on some manufacturing activities across Europe. The analysis is realised employing the concept of vertically integrated labour (Pasinetti, 1973) which allows to account for the employment directly and indirectly involved in the production of final goods. The estimations are derived from Multi-Regional Input-Output tables to map the supply chain and to differentiate between the employment involved in the production of exported intermediate inputs and final goods. The results show that most of the employment involved in the production of final output of the activities studied in the paper is linked to international trade. Although Europe shows a high degree of productive links, there are important differences in the modality of insertion in the productive structure of European countries. Moreover, the impact on the level of employment due to the current economic crisis can be significant, affecting more than 1.3 million of people in Europe. These results are relevant to policy makers, who should consider carefully the high degree of linkages of the European economies when designing measure of support to the economy as domestic uncoordinated policies may have a reduced impact given the existing productive structure.
    Keywords: Vertically integrated labour, Covid-19, Global value chains, Productive integration
    Date: 2020–11
  10. By: Ludmila Fadejeva (Bank of Latvia); Zeynep Kantur
    Abstract: We observe differences in the net wealth distribution by age among European countries. The net wealth distribution in Western EU countries is consistent with the life cycle hypothesis. However, in Eastern EU countries, the wealth distribution is skewed towards younger ages. The aim of the paper is twofold: first, we study the characteristics of economies leading to differences in the net wealth distribution by age; second, we evaluate the impact of these differences on the transmission of monetary policy. To do so, we develop a modified New Keynesian model where the demand side is represented by a multi-period overlapping generation setup, and the supply side of the economy follows the New Keynesian framework. The model is used to analyse the interaction between monetary policy and wealth accumulation originated by demographics and the productivity gap among generations in a coherent general equilibrium model. The HFCS database is used to calibrate the model for two groups of European countries. We find that the shape of net wealth distribution by age has an important bearing on the effectiveness and hence conduct of monetary policy.
    Keywords: overlapping generations model, New Keynesian model, wealth distribution, monetary policy
    JEL: E32 E52 J11
    Date: 2020–09–16

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