nep-eec New Economics Papers
on European Economics
Issue of 2021‒02‒22
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Role of Fiscal Policies for External Imbalances: Evidence from the European Union By António Afonso; José Carlos Coelho
  2. Reforming the Fiscal Rulebook for the Euro Area – and the Challenge of Old and New Public Debt By Jan Priewe
  3. Spillover Effects of the European Central Bank's Expanded Asset Purchase Program to Non-eurozone Countries in Central and Eastern Europe By Lorant Kaszab; Mark Antal
  4. The Joint Impact of Bank Capital and Funding Liquidity on the Monetary Policy's Risk-Taking Channel By Bruno de Menna
  5. A multi-speed fiscal Europe ? Fiscal rules and fiscal performance in the EU former communist countries By Cezara Vinturis
  6. 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle By Mariam Camarero; Alejandro Muñoz; Cecilio Tamarit
  7. Has the Euro paid off? A study of the trade-induced welfare effects of the EMU By Silviano Esteve-Pérez; Salvador Gil-Pareja; Rafael Llorca-Vivero; Jordi Paniagua
  8. A multivariate unobserved components model to estimate potential output in the euro area: a production function based approach By Tóth, Máté
  9. Evaluating the Impact of Labour Market Reforms in Greece during 2010-2018 By Georgios Gatopoulos; Alexandros Louka; Ioannis Polycarpou; Nikolaos Vettas
  10. Uncertainty spill-overs: when policy and financial realms overlap By Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
  11. "Nowcasting and forecasting GDP growth with machine-learning sentiment indicators". By Oscar Claveria; Enric Monte; Salvador Torra
  12. A Safe Harbor: Wealth-Income Ratios in Switzerland over the 20th Century and the Role of Housing Prices By Enea Baselgia; Isabel Martínez

  1. By: António Afonso; José Carlos Coelho
    Abstract: We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1pp of GDP results in a deterioration of the current account deficit of 0.318 ppof GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Equivalence Ricardian Hypothesis in the presence of a fiscal rules index. In addition: i)the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) after 2010, the budget balance positively affectsthe current account balance;and iii) the positive impact of the budget balance on the current account balance is higherin the cases of non-Eurozone countries, high budget deficit countries,and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.
    Keywords: budget deficit; external deficit; European Union; fiscal rules; panel data
    JEL: F32 F41 H62 C33
    Date: 2021–02
  2. By: Jan Priewe
    Abstract: Upholding the EU fiscal rules at the elevated public debt level due to the Corona crisis would trigger a phase of long-standing austerity in the euro area. In this study, major proposals for reforms are reviewed, with a critical focus on the expenditure rule, which is central in many think-tanks’ and academic researchers’ advice. A different reform based on a fiscal analogue to the well-known Taylor-rule for monetary policy is designed here. It is argued that under a low-interest environment growth rates exceed interest rates, a fact not compatible with the present ruleset and with far-reaching consequences. This requires redefining debt sustainability. The proposal chooses as the operational variable for fiscal policy primary balances rather than structural balances. The anchor for fiscal stability, until know the 60% cap on public debt, should be replaced by a cap on the interest payments on public debt at roughly 3% of GDP. This allows higher fiscal space for investment and innovations. The fact that the interest rate burden of all Member States in the euro area stands at the lowest level ever experienced, although the debt level is at an all-time high, clarifies that the focus on the debt ratio is misleading. Change could be possible in the secondary law of the EU without change of the Treaties.
    Keywords: Fiscal rules, public debt, deficit bias, austerity, fiscal policy
    JEL: E43 E62 H62 H63
    Date: 2021
  3. By: Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Mark Antal (European Central Bank)
    Abstract: For a panel of six Central and Eastern European countries outside the eurozone (Bulgaria, Croatia, Czechia, Hungary, Poland and Romania) we estimate the spillover effects of the European Central Bank's Expanded Asset Purchase Program (APP) on exchange rates, equity prices, government bond yields of various maturities, and CDS spreads. We find that the most pronounced spillovers induced sovereign bond yields to drop by around 1-6 basis points in a two-day time window in response to the Public Sector Purchase Program (PSPP) announcements.
    Keywords: ordinary least squares estimation, panel data, unconventional monetary policy
    JEL: E51 E32 E44 F45 F47
    Date: 2021
  4. By: Bruno de Menna (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Despite an extensive literature on the risk–taking channel of monetary policy, the joint impact of bank capital and deposits on the latter remains poorly documented. Yet that prospect is essential for monetary policy taking action under the Basel III framework involving concomitant capital and funding liquidity standards. Using data on euro area from 1999 to 2018 and triple interactions between monetary policy, equity and funding liquidity, we shed light on a "crowding–out of deposits" effect prior to the 2008 GFC which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, our findings also highlight a missing "crowding–out of deposits" effect amongst poorly efficient banks in the aftermath of the GFC. As a result, a trade-off arises between financial stability and increased funding liquidity for these financial intermediaries, making a special treatment required for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area.
    Keywords: Credit risk,Monetary policy transmission,Capital buffer,Funding liquidity
    Date: 2021–02–11
  5. By: Cezara Vinturis (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique, WUT - West University of Timișoara [Roumanie])
    Abstract: This paper shows that, contrary to their favourable effect in the EU non-FCC (Former Communist Countries), fiscal rules do not significantly affect fiscal performance in the group of EU FCC. This finding, which may echo differences between FCC and other EU inherited from the Cold War period, is robust when considering various estimation methods, dividing fiscal rules along various dimensions, and using several observed and computed measures of fiscal performance. However, when going beyond the simple presence of fiscal rules, we find that an improvement of the strength of fiscal rules significantly affects fiscal performance in EU FCC, with a magnitude higher than that in EU non-FCC. Our findings are particularly important from the perspective of the future Euro zone and European Union enlargements, which involve former communist countries, and go along with the adoption of various types of fiscal rules.
    Keywords: fiscal rules,fiscal performance,EU former communist countries,balanced-budget rules
    Date: 2021–01–31
  6. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain)); Alejandro Muñoz (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain) de Marcenado, 27, 28015, Madrid (Spain)); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain))
    Abstract: This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Specifically, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so clear in the peripheral, where the financial and sovereign crises have had a more substantial impact. Our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some caveats that remain unsolved.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Multiple Structural Breaks; Cointegration, unit roots
    JEL: F36 F45 O16
    Date: 2021–02
  7. By: Silviano Esteve-Pérez (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain)); Salvador Gil-Pareja (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain) de Marcenado, 27, 28015, Madrid (Spain)); Rafael Llorca-Vivero (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain)); Jordi Paniagua (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain))
    Abstract: This paper aims to provide policy-relevant insights into the Euro effect. Relying on partial equilibrium estimates using a new dataset that comprises bilateral international and intranational trade flows of 69 countries during the period 1986-2016, we estimate a general equilibrium gravity model that allows us to quantify the welfare effect of the Euro as well as its impact on consumer prices and producer prices. The results of three counterfactual experiments indicate that the Euro has been successful at increasing welfare for Economic and Monetary Union (EMU) and non-EMU member countries. Our results suggest that a two-speed Euro design would have further increased welfare, albeit its distributional effects within countries, i.e., for consumers and producers. The growth effects of the Euro are mainly driven by trade creation outside the EMU, questioning the cohesiveness of the Euro as an optimum currency area.
    Keywords: Euro, trade, welfare, structural gravity, general equilibrium
    JEL: F13 F14
    Date: 2021–02
  8. By: Tóth, Máté
    Abstract: This paper builds an unobserved components model that combines a multivariate filter approach with a Cobb-Douglas production function. This combination allows potential output estimates to incorporate more economic structure than the traditional production function approach, while retaining the ability to conduct growth accounting exercises. The model is a backward-looking state space model estimated with Bayesian methods employing the Kalman filter to jointly decompose six key observable variables (real GDP, unemployment rate, labour force participation rate, hours worked per person, a measure of core inflation and wage inflation) into trend and cyclical components. To do so, it relies on several reduced form relationships across the cyclical components, such as a wage and a price Phillips curve and an Okun's law type relationship, while it also assumes common trends for a few variables and allows for hysteresis effects. The model is estimated on aggregate euro area data with Bayesian methods. The paper finds that the resulting output gap estimates have good revision properties and reasonable forecasting performance in particular in terms of GDP and core inflation vis-a-vis a set of benchmarks. JEL Classification: C32, D24, E32, E37
    Keywords: Bayesian estimation, production function, state-space model
    Date: 2021–02
  9. By: Georgios Gatopoulos; Alexandros Louka; Ioannis Polycarpou; Nikolaos Vettas
    Abstract: In view of long-standing weaknesses in GreeceÕs labour markets, several labour market reforms were implemented during the economic adjustment programmes with two objectives. Firstly, support the economyÕs adjustment through more flexible labour markets and secondly, enhance gains in cost competitiveness. In relation to their objectives, we find evidence that reforms largely fulfilled the second objective and partially the first, albeit left mostly unaddressed some of the long-standing weaknesses, such as low participation rate and high tax wedge. The analysis is backed by two distinct but complementary approaches. From a micro-founded analysis, while the 2014 reduction in social security contributions positively affected incentives for official sector labour participation, those appear to have decreased cumulatively during the overall programme period. From a top-down macroeconomic perspective, findings suggest that GreeceÕs 2012 labour market reforms had a positive impact on reducing Unit Labour Cost (ULC), increasing the use of flexible forms of employment, slowing down unemployment rate dynamics and slightly accelerating employment growth trends. At the same time, it appears that the 2012 reforms did not improve labour participation rates, while they increased average working hours and inequality.
    Keywords: Greek crisis, labour market reforms, impact assessment, participation tax rate, generalised synthetic control
    Date: 2021–02
  10. By: Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
    Abstract: No matter its source, financial- or policy-related, uncertainty can feed onto itself, inflicting the real economic sector, altering expectations and behaviours, and leading to identification challenges in empirical applications. The strong intertwining between policy and financial realms prevailing in Europe, and in Euro Area in particular, might complicate the problem and create amplification mechanisms difficult to pin down. To reveal the complex transmission of country-specific uncertainty shocks in a multi-country setting, and to properly account for cross-country interdependencies, we employ a global VAR specification for which we adapt an identification approach based on magnitude restrictions. Once we separate policy uncertainty from financial uncertainty shocks, we find evidence of important cross-border uncertainty spill-overs. We also uncover a new amplification mechanism for domestic uncertainty shocks, whose true nature becomes more blurred once they cross the national boundaries and spill over to other countries. With respect to ECB policy reactions, we reveal stronger but less persistent responses to financial uncertainty shocks compared to policy uncertainty shocks. This points to ECB adopting a more (passive or) accommodative stance towards the former, but a more pro-active stance towards the latter shocks, possibly as an attempt to tame policy uncertainty spill-overs and prevent the fragmentation of the Euro Area financial markets.
    Date: 2021–02
  11. By: Oscar Claveria (AQR–IREA, Department of Econometrics, Statistics and Applied Economics, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain.); Enric Monte (Department of Signal Theory and Communications, Polytechnic University of Catalunya (UPC).); Salvador Torra (Riskcenter–IREA, Department of Econometrics, Statistics and Applied Economics, University of Barcelona (UB).)
    Abstract: We apply the two-step machine-learning method proposed by Claveria et al. (2021) to generate country-specific sentiment indicators that provide estimates of year-on-year GDP growth rates. In the first step, by means of genetic programming, business and consumer expectations are evolved to derive sentiment indicators for 19 European economies. In the second step, the sentiment indicators are iteratively re-computed and combined each period to forecast yearly growth rates. To assess the performance of the proposed approach, we have designed two out-of-sample experiments: a nowcasting exercise in which we recursively generate estimates of GDP at the end of each quarter using the latest survey data available, and an iterative forecasting exercise for different forecast horizons We found that forecasts generated with the sentiment indicators outperform those obtained with time series models. These results show the potential of the methodology as a predictive tool.
    Keywords: Forecasting, Economic growth, Business and consumer expectations, Symbolic regression, Evolutionary algorithms, Genetic programming. JEL classification: C51, C55, C63, C83, C93.
    Date: 2021–02
  12. By: Enea Baselgia (HSG - University of St.Gallen, SIAW Institute); Isabel Martínez (ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology in Zürich [Zürich], KOF Swiss Economic Institute)
    Abstract: We estimate the ratio of private wealth to national income, βpt, for Switzerland over the period 1900-2018. Our results indicate that the development of βpt in Switzerland did not follow a U-shaped pattern as in most European countries, but that the evolution was extraordinarily stable, with βpt oscillating around 500% over most of the 20th century. However, the wealth-income ratio has been on the rise since the turn of the century to reach 721% in 2017-an unprecedented level in the past. This considerable increase is mainly driven by large capital gains in housing wealth since 2010. We present new crosscountry evidence that capital gains in housing wealth have become an important driver of rising wealth-income ratios in a series of developed economies.
    Keywords: wealth-income ratio,income distribution,economic growth,housing prices
    Date: 2020–12

This nep-eec issue is ©2021 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.