nep-eec New Economics Papers
on European Economics
Issue of 2021‒05‒31
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Systemic Risk Spillovers Across the EURO Area By Alexandros Skouralis
  2. 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle By Mariam Camarero; Alejandro Munoz; Cecilio Tamarit
  3. Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences By Konstantins Benkovskis; Olegs Tkacevs; Karlis Vilerts
  4. Micro level data for macro models: the distributional effects of monetary policy By Luisa Corrado; Daniela Fantozzi
  5. Public Debt and state-dependent Effects of Fiscal Policy in the Euro Area By Snezana Eminidou; Martin Geiger; Marios Zachariadis
  6. The Fall in Income Inequality during COVID-19 in Four European Countries By Andrew E. Clark; Conchita d'Ambrosio; Anthony Lepinteur
  7. An Evaluation of the Effects of the European Commission´s Proposals for the Common Consolidated Corporate Tax Base By Alex Cobham; Petr Jansky; Chris Jones; Yama Temouri
  8. "Employment uncertainty a year after the irruption of the covid-19 pandemic". By Petar Soric; Oscar Claveria
  9. Fiscal Policy Interventions at the Zero Lower Bound By Sabri Boubakera; Duc Khuong Nguyen; Nikos Paltalidis
  10. Independent Policy, Dependent Outcomes: A Game of Cross-Country Dominoes across European Yield Curves By Ioannis Chatziantoniou; David Gabauer; Alexis Stenfor
  11. Productivity dispersion and sectoral labour shares in Europe By Martina Lawless; Luke Rehill
  12. Judicial Efficiency and Economic Growth: Evidence based on EU data By Rizos, Anastasios; Kapopoulos, Panayotis
  13. Corporate taxes, investment and the self-financing rate. The effect of location decisions and exports By Thomas von Brasch; Ivan Frankovic; Eero Tölö
  14. Dynamic linkages among financial stability, house prices and residential investment in Greece By Anastasiou, Dimitrios; Kapopoulos, Panayotis

  1. By: Alexandros Skouralis
    Abstract: The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.
    Keywords: Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks
    JEL: C32 E44 F36 F45
    Date: 2021
  2. By: Mariam Camarero (University Jaume I, University of Valencia, University of Valencia); Alejandro Munoz; Cecilio Tamarit
    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: F
    Date: 2021
  3. By: Konstantins Benkovskis (Bank of Latvia); Olegs Tkacevs (Bank of Latvia); Karlis Vilerts (Bank of Latvia)
    Abstract: This paper analyzes the determinants of interest rate spreads during the period 2014–2020 in the euro area, with a focus on the Baltic countries. Against the background of accommodative monetary policy, interest rates on loans in the euro area have declined markedly, except in a few countries. In Latvia, Lithuania and Estonia, interest rates on new loans to non-financial corporations in 2020 were about the same as in 2014, and at the same time they were among the highest in the euro area. In this study, we apply the Ho and Saunders (1981) theoretical framework to identify explanatory factors of spreads and use the obtained econometric estimates to calculate the so-called pure spread by subtracting the influence of the bank funding structure and other bank-specific factors from the interest rate spread. Our study shows that even after accounting for the conventional determinants of interest rate spread, differences in the pure spread between euro area countries, especially between the Baltic countries and the rest of the euro area, persist. In part, these differences can be explained by varying degrees of financial sector market concentration. However, the bulk of the gap in spreads remains unexplained. The findings of this paper suggest that properly designed policy measures are needed to reduce spreads in the Baltic countries and lessen the fragmentation in the euro area. This would allow for more effective monetary policy transmission and stimulate lending and post-Covid economic recovery in the Baltics.
    Keywords: tax interest rate spread, interest rate on loans, market concentration
    JEL: G21 L11 E43 E52
    Date: 2021–05–18
  4. By: Luisa Corrado; Daniela Fantozzi
    Abstract: In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use a novel database based on the survey micro level data on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment which enables us to compute measures of inequality and the distribution over time for different incomes and subgroups of individuals. The identification strategy is based on the monetary surprises estimated in the Euro area Monetary Policy Event-Study Database (EA-MPD) for the Euro area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios: 1999-2012 (pre-QE) and 1999-2017 (including the QE period). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable, labor and financial income more persistently than a conventional monetary shock. These effects are heterogeneous and seem to benefit mostly the bottom of the distribution. The impact on financial wealth is ambiguous favoring the wealthy households mainly in the short-run. Our evidence suggests that QE is associated with a decrease in Italian households’ inequality.
    Keywords: Income Inequality, monetary policy, Local Projections, Survey Data, High-Frequency Data
    JEL: C81 D31 E52 E58
    Date: 2021–05
  5. By: Snezana Eminidou; Martin Geiger; Marios Zachariadis
    Abstract: We investigate public debt related state dependencies in the impact of fiscal policy shocks on the macroeconomy for a panel of fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. We observe that differences in the time-serial as well as in the cross-sectional dimension play an important role driving the impact of fiscal policy. In the high-debt cross sectional state, output, consumption and inflation, as well as consumption intentions and inflation expectations, go up in response to a positive government spending shock, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers simultaneously time-serial and cross-sectional high- and low-debt states, our results suggest that cross-sectional debt variation is more important in driving cross-country differences in the responses to expenditure shocks across the euro area.
    Keywords: government spending, shock, debt-to-gdp, output, consumption, inflation, credit constraints, expectations
    JEL: E62 E3 H63 H3
    Date: 2021–05
  6. By: Andrew E. Clark (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 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); Conchita d'Ambrosio (University of Luxembourg [Luxembourg]); Anthony Lepinteur (University of Luxembourg [Luxembourg])
    Abstract: We here use panel data from the COME-HERE survey to track income inequality during COVID-19 in France, Germany, Italy, and Spain. Relative inequality in equivalent household disposable income among individuals changed in a hump-shaped way between January 2020 and January 2021, with an initial rise from January to May 2020 being more than reversed by September 2020. Absolute inequality also fell over this period. Due to the pandemic some households lost more than others, and government compensation schemes were targeted towards the poorest, implying that on average income differences decreased. Generalized Lorenz domination reveals that these distributive changes reduced welfare in Italy.
    Keywords: COVID-19,Income Inequality COME-HERE,COME-HERE,Income Inequality
    Date: 2021–05
  7. By: Alex Cobham (Tax Justice Network, United Kingdom); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Chris Jones (Aston University, United Kingdom); Yama Temouri (Aston University, United Kingdom & Khalifa University, United Arab Emirates)
    Abstract: This paper evaluates the Common Consolidated Corporate Tax Base (CCCTB) recently proposed by the European Commission. We find that if the CCCTB is introduced as it is currently proposed (including loss consolidation), then it is likely to impose large tax revenue costs of about one fifth of the corporate tax base. Second, we show that an application of the CCCTB proposals at only the European Union (EU) level would overlook the extent of profit shifting out of the EU and could lock in further unnecessary revenue losses. Third, major EU profit-shifting countries such as Luxembourg, Ireland and the Netherlands may experience significant revenue losses.
    Keywords: Common Consolidated Corporate Tax Base, CCCTB, corporate taxation, profit shifting, European Union, multinational enterprises
    JEL: F23 H25 H32
    Date: 2021–05
  8. By: Petar Soric (Faculty of Economics and Business, University of Zagreb.); Oscar Claveria (AQR-IREA, University of Barcelona.)
    Abstract: This paper examines the evolution of consumer uncertainty about unemployment one year after the irruption of the covid-19 pandemic in European countries. Since uncertainty is not directly observable, we use two alternative methods to directly approximate it. Both approaches are based on qualitative expectations elicited form the consumer survey conducted by the European Commission. On the one hand, following Dibiasi and Iselin (2019), we use the share of consumers unable to formalize expectations about unemployment (Knightian-type uncertainty). On the other hand, we use the geometric discrepancy indicator proposed by Claveria et al. (2019) to quantify the proportion of disagreement in business and consumer expectations. We have used information from 22 European countries. We find that both uncertainty measures covary. Although we observe marked differences across countries, in most cases the perception of employment uncertainty peaked before the outbreak of the crisis, plummeted during the first months of the lockdown, and started rising again since the past few months. When testing for cointegration with the unemployment rate, we find that the discrepancy indicator exhibits a long- term relationship with unemployment in most countries, while the Knightian uncertainty indicator shows a purely short-run relationship. The impact of both indicators on unemployment is characterised by considerable asymmetries, showing a more intense reaction to decreases in the level of uncertainty. While this finding may seem counterintuitive at first sight, it somehow reflects the fact that during recessive periods, the level of disagreement in the employment expectations of consumers drops considerably.
    Keywords: COVID-19, Employment uncertainty, Unemployment expectations, Disagreement, Consumers, Cointegration. JEL classification: C14, C32, C82, C83, J01.
    Date: 2021–05
  9. By: Sabri Boubakera; Duc Khuong Nguyen; Nikos Paltalidis
    Abstract: We build on a New Keynesian dynamic stochastic general equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in Eurozone. In this setting, we find that the big four Eurozone economies (France, Germany, Italy and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government-spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound as suggested by Krugman (1998) and modeled by Eggertsson (2010) and Christiano, Eichenbaum and Rebelo (2011). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand supply do not appear to have the same power in the short-run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.
    Keywords: Fiscal policy; Liquidity trap; Fiscal multipliers; Zero lower bound
    JEL: E12 E52 E62 E63
  10. By: Ioannis Chatziantoniou (University of Portsmouth); David Gabauer (Software Competence Center Hagenberg); Alexis Stenfor (University of Portsmouth)
    Abstract: This study investigates the dynamic transmission mechanism between 2Y, 5Y and 10Y interest rate swaps (IRS) for six European currencies (CHF, DKK, EUR, GBP, NOK and SEK) from August 6, 1999 to March 4, 2021 applying the time-varying parameter vector autoregressive connectedness approach in the spirit of Antonakakis et al. (2020). Furthermore, the connectedness approach (Diebold and Yılmaz, 2012, 2014) is extended to allow analyzing aggregated and conditional connectedness measures which improve their interpretability and obtain more in-depth information concerning the cross-maturity/cross-currency propagation mechanism. We document that EUR and DKK have been the most prominent transmitters of shocks in the network. We also find that the 10Y IRS has increasingly assumed a net-transmitting role at the expense of the 2Y IRS – in line with a shift towards unconventional monetary policy and quantitative easing. From a policymaking perspective, this implies means that the role of the domestic short-term interest rate has lost relevance for the monetary transmission mechanism at the expense of the foreign long-term interest rate.
    Keywords: Dynamic Connectedness; Aggregated Connectedness, Conditional Connectednes; Interest Rate Swaps; TVP-VAR; Yield Curves.
    JEL: C32 C5 F3 G15
    Date: 2021–05–25
  11. By: Martina Lawless; Luke Rehill
    Abstract: The stability of the labour share of income is a fundamental feature of macroeconomic models, with broad implications for the shape of the production function, inequality, and macroeconomic dynamics. However, empirically, this share has been slowly declining in many countries for several decades, though its causes are subject of much debate. This paper analyses the drivers of labour share developments in Europe at a sectoral level. We begin with a simple shift-share analysis which demonstrates that the decline across countries has been primarily driven by changes within industries. We then use aggregated microdata from CompNet to analyse drivers of sector-level labour shares and to decompose their effects into shifts in the sector average or reallocation of resources between firms. Our main findings are that the advance of globalisation and the widening productivity gap between “the best and the rest” have negative implications for the labour share. We also find that most of the changes are due to reallocation within sectors providing support for the “superstar firms” hypothesis. The finding that globalisation has had a negative impact on the labour share is of relevance for policy in the context of the current backlash against globalisation and reinforces the need to ensure benefits of globalisation and productivity are passed on to workers.
    Keywords: globalisation, labour shares, productivity
    JEL: E25 O40 F62
    Date: 2021–05–26
  12. By: Rizos, Anastasios; Kapopoulos, Panayotis
    Abstract: The growth-enhancing property of a well-functioned judicial system is documented on the back of the safeguarding of property rights and legal investor protection, the well-functioning of financial markets, the support to entrepreneurship and the upholding of the firm growth. We investigate the effects of judicial efficiency on economic growth, using a new dataset over the period 2010-2018 drawn by the EU Justice Scoreboard study. More specifically, we estimate a static growth equation controlling for alternative judicial efficiency measures. Our findings corroborate that the inefficiencies in the operation of judicial systems pose obstacles to economic growth, and consequently, positive developments in judicial efficiency can be growth enhancing. Specifically, inefficiencies in the operation of judicial systems, measured alternatively as (a) lengthier court proceedings, (b) lower rates of clearance of accumulated unresolved cases, (c) increasing burden of pending cases and (d) a high inflow of new cases, all undermine economic growth. Our results justify the further adoption of judicial reforms in European Union members, that strengthen the enforcement of private contracts, incentivizing the domestic and external investment decisions and supporting the European economies to achieve and sustain robust growth rates. Finally, we find that civil origin legal systems, which are characterized by a higher degree of formalism in judicial procedures relative to common law origin systems, hinder economic growth.
    Keywords: judicial efficiency, economic growth, disposition time, clearance rate, caseload
    JEL: C23 C26 K40 O43
    Date: 2021–05
  13. By: Thomas von Brasch (Statistics Norway); Ivan Frankovic; Eero Tölö
    Abstract: In this paper, we study how lower corporate tax rates impact investment by including two novel channels into a DSGE model used for fiscal policy analysis in Norway. We capture both how foreign firms relocate and invest in the country when corporate taxes are reduced and how the inflow of FDI increase exports which spills over to domestic firms who then increase their investment further. We find that a one percentage point reduction in the corporate tax rate increases investment by 0.6%, most of which can be attributed to the FDI-export link. The corporate tax cut becomes self-financed when the FDI-export link is included, but only if other countries do not follow suit and also lower their corporate tax rates. When using the model to analyze the tax reform in Norway from 2014 to 2019, we find overall positive effects on investment and employment.
    Keywords: Corporate profit tax; Foreign direct investment; Exports; Imports; User cost of capital; Depreciation; Tax reform
    JEL: E62 H21 H25 H32
    Date: 2021–05
  14. By: Anastasiou, Dimitrios; Kapopoulos, Panayotis
    Abstract: Constructing a financial stress index, we examine the relationship between financial stability and real estate price fluctuation in Greece, whose experience during the last two decades makes it an ideal laboratory. Employing a VAR and a Bayesian VAR model, we demonstrate the ability of this measure to explain the phases of the housing market (in terms of both residential prices and investment). We find that an adverse shock in financial stability has prolonged adverse effects in the Greek real estate market. Our findings also suggest that residential prices are more sensitive to changes in financial stress conditions than residential investment.
    Keywords: House prices; residential investment; financial stability; uncertainty
    JEL: C10 C22 E0 E44 E6
    Date: 2021

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