nep-eec New Economics Papers
on European Economics
Issue of 2021‒02‒08
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Multilateral Divisia monetary aggregates for the Euro Area By Barnett, William; Gaekwad, Neepa
  2. Issuance and valuation of corporate bonds with quantitative easing By Pegoraro, Stefano; Montagna, Mattia
  3. Collective Memories on the 2010 European Debt Crisis By Laura Arnemann; Kai A. Konrad; Niklas Potrafke
  4. Bankruptcy Codes and Risk Sharing of Currency Unions By Xuan Wang
  5. The Effect of Legislated Tax Changes on the Trade Balance: Empirical Evidence for the United States, Germany, and the United Kingdom By Bernd Hayo; Sascha Mierzwa
  6. Aggregate and Disaggregate Natural Resources Agglomeration and Foreign Direct Investment in France By Audi, Marc; Ali, Amjad; Roussel, Yannick
  7. Employment Effects of Immigration to Germany in the Period of Migration Policy Liberalization, 2005–2018 By Isil Erol; Umut Unal
  8. Employment mobility and labour market flexibility in the EU By Vassilis Monastiriotis; Stylianos Sakkas
  9. One size fits some: analysing profitability, capital and liquidity constraints of custodian banks through the lens of the SREP methodology By Coste, Charles-Enguerrand; Tcheng, Céline; Vansieleghem, Ingmar
  10. Fiscal Sustainability and Low Interest Rates: A Note By Martin Werding

  1. By: Barnett, William; Gaekwad, Neepa
    Abstract: In light of the “two-pillar strategy” of the European Central Bank, good measures of aggregated money across countries in the Euro area are policy relevant. The objective of this paper is to focus on the multilateral Divisia monetary aggregates for the Euro area to produce a theoretically consistent measure of monetary services for the Euro area monetary union. Based on theory developed in Barnett (2007), the multilateral Divisia monetary aggregates for 17 Euro area countries are found to provide a better signal of recession, when compared to the corresponding simple sum monetary aggregates.
    Keywords: Divisia index, European Union, European Monetary Union, Monetary aggregation.
    JEL: C43 C82 E51 E52 F33
    Date: 2021–01
  2. By: Pegoraro, Stefano; Montagna, Mattia
    Abstract: After the announcement of the European Central Bank’s corporate quantitative easing program, non-financial corporations timed the bond market by shifting their issuance toward bonds eligible for the program. However, issuers of eligible bonds did not increase total issuance compared to other issuers; nor did they experience different economic outcomes. Instead, the announcement produced substantial spillover effects on risk premia. Credit risk premia declined, both in the corporate bond market and in the default swap market, whereas the valuation of eligible bonds did not change relative to comparable ineligible bonds. Firms took advantage of reduced risk premia by issuing riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. Our model indicates corporate market timing is instrumental in allowing quantitative easing to produce spillover effects. JEL Classification: G32, G12, E52, E58, E44
    Keywords: corporate bonds, CSPP, market timing, quantitative easing, risk premia
    Date: 2021–01
  3. By: Laura Arnemann; Kai A. Konrad; Niklas Potrafke
    Abstract: We examine whether collective memories on the aid&reform programs chosen to handle the 2010 European debt crisis differ between citizens from borrower and lender countries. We use new international survey data for non-experts and experts in member countries of the euro area. The results show that non-experts from borrower and lender countries remember aspects of the programs in different manners; indicating biases for assessments of how the crisis outcomes are perceived in borrower and lender countries. Nation-serving biases may well explain if the European debt crisis has reduced the sense of belonging rather than bringing European citizens closer together.
    Keywords: collective memories, European debt crisis, nation-serving biases, aid&reform programmes, experts
    JEL: F36 F55 H12 H87
    Date: 2021
  4. By: Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
    Keywords: Equilibrium default, bankruptcy code, fiscal union, capital markets union, financial stability, bank credit and inside money, price-level and exchange rate determinacy, liquidity-intermediary asset pricing
    JEL: E42 F33 G15 G21
    Date: 2021–01–21
  5. By: Bernd Hayo (Philipps University Marburg); Sascha Mierzwa (Philipps University Marburg)
    Abstract: Using a narrative account of quarterly discretionary changes in tax liabilities from 1974Q4 to 2018Q2 in a VAR setting, we study whether legislative tax changes affect the trade balance in the United States, Germany, and the United Kingdom. As legislative tax changes we consider (i) all changes, (ii) personal income tax changes, (iii) business tax changes, (iv) indirect tax changes in Germany and the UK, (v) spillovers of US tax changes into Germany and the UK, and (vi) asymmetric reactions after tax hikes and cuts. Generally, we find that after a reduction in aggregated tax liabilities, imports and exports in the US and Germany react quite similarly: imports tend to rise; exports do not change much. Consequently and fostered by growing output—the net-exports-to-GDP ratio decreases. We find no clear net effect in the UK. Instead, UK imports only increase after cuts to indirect taxes. However, employing normal variations of the tax changes as a yardstick, the economic magnitude of the estimated effects on the trade variables is not particularly large. Thus, there remain doubts as to whether tax policy is an effective instrument for addressing trade imbalances.
    Keywords: Fiscal policy, tax policy, legislated tax changes, trade balance, exports, imports, Germany, United Kingdom, United States, VAR, narrative approach
    JEL: E62 F41 H30 K34
    Date: 2021
  6. By: Audi, Marc; Ali, Amjad; Roussel, Yannick
    Abstract: The inflow of foreign direct investment shows the economic and political strength of a country (Bevan & Estrin, 2004). Resources agglomeration and foreign direct investment have a theoretical and empirical relationship (Carlton, 1983; Hansen, 1987; Krugman, 1991; Wheeler and Mody, 1992; Friedman et al., 1992; Head et al., 1995; Henderson and Kuncoro, 1996; Head and Ries, 1996; Devereux and Griffith, 1998; Head et al.,1999; Guimaraes et al., 2000). This paper has examined the impact of aggregate and disaggregate natural resources agglomeration on foreign direct investment in the case of France from 1989 to 2012. Seven different model specifications are used for empirical analysis. The inflow of foreign direct investment from Greece, Australia, Austria, Germany, Canada, Finland, Ireland, Hungary, Israel, Japan, Italy, Republic of South Korea, Switzerland, Norway, Netherlands, Poland, Spain, Portugal, Sweden, Turkey, United States, Mexico, Korea and United Kingdom in France is taken as the dependent variable. Total natural resources agglomeration, population density, trade openness, secondary education, taxes, inflation rate, primary education, agriculture land agglomeration, forest agglomeration, oilproduction agglomeration, mineral production agglomeration and natural gas production agglomeration are selected as explanatory variables. The results show that aggregate and disaggregate natural resources agglomeration are important indicators of foreign direct investment. The results show that the population density is a key indicator of foreign direct investment, the current population growth of France and many developed countries is below the replacement rate. Agriculture land agglomeration, oil production agglomeration and mineral production agglomeration are the inputs of many economic activities. This shows that for higher amount of foreign direct investment, natural resources agglomeration must be encouraged.
    Keywords: natural resources agglomeration, foreign direct investment
    JEL: F21 N5
    Date: 2021–01
  7. By: Isil Erol (Queensland University of Technology); Umut Unal (Philipps University Marburg)
    Abstract: Germany has undergone a significant migration policy shift since the early 2000s. This paper examines the total employment effect of immigration during the liberalization of migration policies from 2005 to 2018 using a spatial approach. A set of methods, along with static and dynamic macro-econometric models, were applied on a balanced panel formed by a unique and manually collected data for 156 statistical regions based on the definition of the German Federal Employment Agency. We find suggestive evidence that there has been a significant adverse impact of new immigrants on the overall employment rate, and this negative effect is substantially larger than those reported in previous studies on the employment effect of immigration in the German labour market. In a further step, we divide our sample into two subsamples to capture the employment effect of the massive humanitarian inflows that began in 2015. Our results indicate that, in addition to the new immigrants' lower rate of integration into the local labour markets, a sudden influx of asylum seekers may possibly lead to a substantial fall in the employment rates, because asylum seekers are not immediately allowed to work in the country.
    Keywords: Immigration, Labour market, Employment, Labour Economics, Asylum seekers
    JEL: J00 J15 J61
    Date: 2021
  8. By: Vassilis Monastiriotis (London School of Economics); Stylianos Sakkas (European Commission - JRC)
    Abstract: Does employment flexibility facilitate cross-regional adjustments via labour mobility? Or is it instead a hinderance to cross-regional equilibration in the labour market? We examine this, drawing on a sample of 11 European countries belonging to different 'varieties' of European capitalism. We identify two opposing potential effects of employment flexibility on outmigration (a negative necessitating effect and a positive facilitating effect) and provide original evidence on the ways in which employment flexibility impacts of the responsiveness of inter-regional outmigration to regional unemployment. We find that employment flexibility is at large associated with less cross-regional adjustability. This is especially so for numerical aspects of flexibility (non-standard forms of employment contracts) and more true for countries in the European south and Scandinavia; while for internal aspects of employment flexibility (irregular hours and patterns of work), as well as for countries of the Continental 'variety' (coordinated market economies), employment flexibility appears to be more synergetic to cross-regional adjustability (via outmigration). We draw implications for our understanding of cross-regional equilibration and for labour market and wider EU policies.
    Keywords: Employment flexibility, regional migration, labour market adjustment
    JEL: R11 R23 J08 J61
    Date: 2021–01
  9. By: Coste, Charles-Enguerrand; Tcheng, Céline; Vansieleghem, Ingmar
    Abstract: Custodians play a key but discrete role in the global financial market infrastructure. In Europe, they are licensed as “credit institutions ”, a legal requirement for European deposit-taking institutions, and therefore they face the same prudential requirements as “traditional” banks. However, their business model and risk profile are different from those of traditional banks since the core of their activity does not encompass balance sheet transformation and the associated risks. JEL Classification: G15, G21, G28, L22
    Keywords: bank, credit institution, custodian, prudential supervision
    Date: 2021–01
  10. By: Martin Werding
    Abstract: In this paper, I demonstrate that an indicator which is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. I illustrate this finding based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.
    Keywords: public budget, public debt, fiscal sustainability, interest rates
    JEL: H60 J11 E43
    Date: 2021

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