nep-eec New Economics Papers
on European Economics
Issue of 2021‒05‒10
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Tracking global economic uncertainty: implications for the euro area By Bobasu, Alina; Geis, André; Quaglietti, Lucia; Ricci, Martino
  2. Who Talks During Monetary Policy Quiet Periods, and Why? Evidence from the European Central Bank's Governing Council By Gnan, Phillipp; Rieder, Kilian
  3. Reset required: The euro area crisis management and deposit insurance framework By Huertas, Thomas F.
  4. What Shifts Did COVID-19 Year 2020 Bring to the Labour Market in Europe? By Baert, Stijn
  5. The Transmission Channels of Government Spending Uncertainty By Anna, Beliansk; Eyquem, Aurélien; Poilly, Céline
  6. Does the interest parity puzzle hold for Central and Eastern European economies? By Dąbrowski, Marek A.; Janus, Jakub
  7. The Exchange Rate Insulation Puzzle By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot; Schmidt, Sebastian
  8. Foreign banks and the doom loop By Albertazzi, Ugo; Cimadomo, Jacopo; Maffei-Faccioli, Nicolò
  9. The effects of publicly supported environmental innovations on firm growth in the European Union By Florian Flachenecker; Martin Kornejew; Mario Lorenzo Janiri
  10. European firm concentration and aggregate productivity By Bighelli, Tommaso; Di Mauro, Filippo; Melitz, Marc J.; Mertens, Matthias
  11. Misfortunes Never Come Alone: From the Financial Crisis to the Covid-19 Pandemic By Moreno Ibáñez, Antonio; Ongena, Steven; Ventula Veghazy, Alexia; Wagner, Alexander F
  12. Public Guarantees for Small Businesses in Italy during Covid-19 By Core, Fabrizio; De Marco, Filippo
  13. Automation, Offshoring and Employment Distribution in Western Europe By Jocelyn Maillard

  1. By: Bobasu, Alina; Geis, André; Quaglietti, Lucia; Ricci, Martino
    Abstract: This paper sheds light on the impact of global macroeconomic uncertainty on the euro area economy. We build on the methodology proposed by Jurado et al. (2015) and estimate global as well as country-specific measures of economic uncertainty for fifteen key euro area trade partners and the euro area. Our measures display a clear counter-cyclical pattern and line up well to a wide range of historical events generally associated with heightened uncertainty. In addition, following Pier and Podstawski (2018), we estimate a Proxy SVAR where we instrument uncertainty shocks with changes in the price of gold around specific past events. We find that, historically, global uncertainty shocks have been important drivers of fluctuations in euro area economic activity, with one standard deviation increase in the identified uncertainty shock subtracting around 0.15 percentage points from euro area industrial produc-tion on impact. JEL Classification: D81, C11, C55, E32, F41, F62
    Keywords: Economic Activity, Forecast Errors, Proxy SVAR, Stochastic Volatility, Uncertainty
    Date: 2021–04
  2. By: Gnan, Phillipp; Rieder, Kilian
    Abstract: This paper provides the first systematic analysis of individual monetary policy-makers' incentives to communicate during so called "quiet periods" in the run-up to policy meetings. We ask why and when monetary policy-makers breach quiet period rules. Based on proprietary compilations by the European Central Bank's (ECB) Directorate General Communications, we construct a novel statement-level data set documenting all public statements by ECB Governing Council members during the 116 quiet periods between October 2008 and January 2020. We describe the broad trends in quiet period communication since 2008. While career concerns and home bias do not explain breaching behavior, we find that members' policy-making experience and expertise are associated with explicit breaches of the quiet period. Following a statement-by-statement review of the ECB's classification of statements, we also provide an alternative series of quiet period breaches. We show that the difference between the original ECB series and our alternative series is driven by diverging records of explicit breaches by ECB Executive Board members before 2014. Finally, we exploit plausibly exogenous variation in the ECB rotational voting schedule to show that Governing Council members' communication behavior during the quiet period is consistent with the narrative of the ECB Governing Council as a collegial, consensus-seeking decision-making body. Our findings directly contribute to the growing literature on free-riding, career concerns and transparency in monetary policy-making. We also discuss several empirically founded policy implications of our paper relevant to the design of the quiet period in the euro area and monetary policy communication more generally.
    Keywords: career concerns; central bank communication; Central bank transparency; decision-making; European Central Bank; Home Bias; leaks; monetary policy; quiet period; rotational voting
    JEL: D82 D83 E52 E58 E61 G12
    Date: 2021–01
  3. By: Huertas, Thomas F.
    Abstract: The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. Although its policy objectives remain valid, the means of achieving them do not. As the euro area comes the end of the long transition period taken to implement the BRRD/SRMR, it should take the opportunity to reset expectations about resolution. Above all, resolution should be for the many, not just the few. There should be a single presumptive path for dealing with failed banks: the use of bail-in to facilitate orderly liquidation under a solvent-wind down strategy. This will protect deposits and set the stage - together with the backstop that the European Stability Mechanism provides to the Single Resolution Fund (SRF) -- for the transformation of the SRF into the Single Deposit Guarantee Scheme (SDGS). To avoid forbearance, responsibility for emergency liquidity assistance (ELA) should rest, not with national central banks, but with the ECB as a single lender of last resort. Finally, national deposit guarantee schemes should function as institutional protection schemes and become investors of last resort in their member banks. Together, these measures would complete Banking Union, promote market discipline, avoid imposing additional burdens on taxpayers, help untie the doom loop between weak banks and weak governments, strengthen the euro and enhance financial stability.
    Keywords: Deposit Insurance,Crisis Management,BRRD,Resolution
    Date: 2021
  4. By: Baert, Stijn (Ghent University)
    Abstract: This letter discusses the evolution of key labour market indicators in the EU-27 countries between 2019 and 2020, i.e. between the year before the COVID-19 crisis broke out and the year in which it impacted the economy heavily. Whereas earlier policy-oriented studies have dealt with the evolution of unemployment in 2020, often country by country, this letter focuses on the evolution of unemployment as well as inactivity across European countries. Indeed, previous crises have typically led not only to more unemployment but also to larger numbers of discouraged unemployed and thus more inactivity. It appears that the Southern European countries, in particular, recorded increases in inactivity, while the Baltic States experienced higher unemployment. In many other countries, unemployment and inactivity remained remarkably stable despite COVID-19.
    Keywords: disincentive effect, iceberg decomposition, COVID-19, employment, inactivity, unemployment
    JEL: J64 J08 J23 J24 J68
    Date: 2021–04
  5. By: Anna, Beliansk; Eyquem, Aurélien; Poilly, Céline
    Abstract: Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect -- resulting from the imperfect substitutability among both assets -- acts as a critical amplifier of the usual transmission channels.
    Keywords: Government spending uncertainty; portfolio adjustment cost; stochastic volatility
    JEL: E52 E62
    Date: 2021–03
  6. By: Dąbrowski, Marek A.; Janus, Jakub
    Abstract: This paper examines the uncovered interest parity (or forward premium) puzzle in four Central and Eastern European countries -- Czechia, Hungary, Poland, and Romania -- as well as their aggregates from 1999 to 2019. Because the interest parity is a foundation of open-macroeconomy analyses, with important implications for policymaking, especially central banking, more systematic evidence on interest parities in the CEE economies is needed. In this study, we not only address this need but also add to a broader discussion on the UIP puzzle after the global financial crisis. The UIP is verified vis-à-vis three major currencies: the euro, the U.S. dollar, and the Swiss franc. We start by providing a full set of baseline forward premium regressions for which we examine possible structural breaks and perform a decomposition of deviations from the UIP. Next, we explore augmented UIP models and introduce various factors which potentially account for the UIP puzzle, such as the realized volatility of the exchange rate, a volatility model of the excess returns, and international risk and business cycle measures. The study shows that the choice of the reference currency matters for the outcome of the interest parity tests in the CEE economies. The puzzle prevails for the EUR and the CHF but not for the USD, a regularity that has not been documented in previous studies. Second, we find that structural breaks in the time series used to test the UIP are not an essential reason for the general failure of the parity in the region. Third, we demonstrate that even though the risk-based measures largely improve the baseline testing regression, both from statistical and economic points of view, they do not alter the overall outcomes of our empirical models. Additionally, we show that the exchange rate peg of the Czech koruna to the euro from 2013 to 2017 had a significant impact on the UIP. A detailed case study on Poland, using granular survey data, indicates that the directly measured exchange rate expectations do not seem to be informed by the UIP relationship. Employing data on option-implied risk reversals, we reveal that the limited resilience of CEE economies to rare disasters may plausibly explain deviations from the UIP.
    Keywords: interest parity puzzle; forward premium puzzle; risk premium; Fama regression; Central and Eastern Europe
    JEL: F31 F41 G15
    Date: 2021–05–04
  7. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot; Schmidt, Sebastian
    Abstract: The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogoff, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not---flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data.
    Keywords: dominant currency pricing; effective lower bound; Exchange rate; external shock; Insulation; International spillovers; monetary policy
    JEL: E31 F41 F42
    Date: 2021–01
  8. By: Albertazzi, Ugo; Cimadomo, Jacopo; Maffei-Faccioli, Nicolò
    Abstract: This paper explores whether foreign intermediaries stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. Tensions in the government debt market may lead to serious disruptions in the provision of lending (i.e., the so-called “doom loop”). In this context, the presence of foreign banks poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, the presence of foreign lenders is found to stabilise lending, thus mitigating the doom loop. JEL Classification: E5, G21
    Keywords: international banks, lending activity, sovereign stress
    Date: 2021–04
  9. By: Florian Flachenecker (European Commission, Joint Research Centre, Brussels, Belgium); Martin Kornejew (University of Bonn, Bonn, Germany); Mario Lorenzo Janiri (European Commission, Joint Research Centre, Brussels, Belgium)
    Abstract: Enabling innovations with environmental benefits is considered crucial to align economic and environmental objectives. We estimate the economic effects of publicly supported environmental innovations for the business economy of 13 Member States of the European Union. Using an instrumental variable approach to address the inherent endogeneity problem, we find that the average publicly supported environmental innovation increases firm employment by 9%, turnover by 12% and market share by 12% over a two-year period. Notwithstanding country and sector heterogeneity, essentially all countries and sectors show positive effects. Moreover, the results are not driven by highly innovative firms but are based on small and medium-sized enterprises with limited innovation activity. Thus, this paper provides robust evidence that public financial support for environmental innovations can align economic and environmental objectives for a broad set of firms, sectors and countries. Public policy supporting environmental innovations might therefore facilitate the recovery and transition to a more sustainable economy.
    Keywords: eco-innovation; environmental innovation; competitiveness; firm growth; European Union
    JEL: C26 O31 O44 Q32 Q56
    Date: 2021–06
  10. By: Bighelli, Tommaso; Di Mauro, Filippo; Melitz, Marc J.; Mertens, Matthias
    Abstract: This article derives a European Herfindahl-Hirschman concentration index from 15 micro-aggregated country datasets. In the last decade, European concentration rose due to a reallocation of economic activity towards large and concentrated industries. Over the same period, productivity gains from reallocation accounted for 50% of European productivity growth and markups stayed constant. Using country-industry variation, we show that changes in concentration are positively associated with changes in productivity and allocative efficiency. This holds across most sectors and countries and supports the notion that rising concentration in Europe reflects a more efficient market environment rather than weak competition and rising market power.
    Keywords: allocative efficiency,European market structure,firm concentration,market power,productivity
    JEL: D24 E25 F15 L11 L25
    Date: 2021
  11. By: Moreno Ibáñez, Antonio; Ongena, Steven; Ventula Veghazy, Alexia; Wagner, Alexander F
    Abstract: Is there a connection between the 2007-2009 financial crisis and the COVID-19 pandemic? To answer this question we examine the relation between both macroeconomic and financial losses derived from the financial crisis and the health outcomes associated with the first wave of the pandemic. At the European level, countries more affected by the financial crisis had more deaths relative to coronavirus cases. We find an analogous significant relation across Spanish provinces and a transmission mechanism running from finance to health outcomes through cross-sectional differences in health facilities.
    Date: 2021–03
  12. By: Core, Fabrizio; De Marco, Filippo
    Abstract: This paper investigates whether the private sector can efficiently allocate public funds during a crisis. Using loan-level data, we exploit the unique features of the Italian public guarantee scheme during Covid-19 to study lenders' incentives to distribute government guaranteed credit. Our results indicate that two key bank characteristics facilitated loan disbursement: size and information technology. These factors are important because of the high volume of online applications and low interest margins on guaranteed lending. Pre-existing relationships matter for the allocation of guaranteed credit, as banks lend more in their core markets and where they have a larger share of local branches.
    Keywords: COVID-19; Information Technology; Lending relationships; liquidity constraints; public guarantees
    JEL: G21 G28
    Date: 2021–02
  13. By: Jocelyn Maillard (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France)
    Abstract: This paper investigates the effects of automation and offshoring on the dynamics of the occupational distribution of employment with a focus on Western Europe between 2000 and 2016. I use a general equilibrium model with three regions, three types of workers, ICT capital, trade in final goods and endogenous offshoring. Fed with exogenous measures of ICT-capital prices and trade costs, the model replicates key features of the data. It matches the observed dynamics of offshoring to Eastern Europe and Asian countries. It also reproduces accurately the observed polarization of the labor market: abstract and manual labor increase while routine labor falls. A counterfactual experiment reveals that automation is the main driver of polarization. Since it is also the only factor that drives individuals to become abstract (high-skill) workers, it is welfare enhancing. The effects of falling trade costs on labor polarization are smaller, but imply welfare gains.
    Keywords: Automation, offshoring, labor-market polarization, European employment distribution
    JEL: F16 F41 J24 J62 O33
    Date: 2021

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