nep-eec New Economics Papers
on European Economics
Issue of 2021‒07‒19
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic Policy Making and Current Account Imbalances in the Euro Area By Taiki Murai; Gunther Schnabl
  2. Euro area periphery countries' fiscal policy and monetary policy surprises By Hülsewig, Oliver; Rottmann, Horst
  3. Fundamentals vs. policies: can the US dollar's dominance in global trade be dented? By Georgios Georgiadis; Helena Le Mezo; Arnaud Mehl; Cédric Tille
  4. The uneven impact of the health crisis on the euro area economies in 2020 By Ángel Luis Gómez; Ana del Río
  5. Media sentiment on monetary policy: determinants and relevance for inflation expectations By Matthieu PICAULT; Julien PINTER; Thomas RENAULT
  6. The German "debt brake": Success factors and challenges By Feld, Lars P.; Reuter, Wolf Heinrich
  7. Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: the EMU experience of Portugal By António Afonso; José Carlos Coelho
  8. Is Macroprudential Policy Driving Savings? By André Teixeira; Zoë Venter
  9. Estimation and Machine Learning Prediction of Imports of Goods in European Countries in the Period 2010-2019 By Costantiello, Alberto; Laureti, Lucio; Leogrande, Angelo
  10. Tax Revenue Forecast Errors: Wrong Predictions of the Tax Base or the Elasticity? By Marcell Göttert; Robert Lehmann

  1. By: Taiki Murai; Gunther Schnabl
    Abstract: The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.
    Keywords: current account, current account imbalances, financial account, euro, EU, European Monetary Union, monetary policy, fiscal policy, TARGET2
    JEL: H62 F32 F33 F42
    Date: 2021
  2. By: Hülsewig, Oliver; Rottmann, Horst
    Abstract: In this study, we explore how fiscal policy in euro area periphery countries responds to monetary policy surprises that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. Using Jordà's (2005) local projection method we find that fiscal discipline, on average, does not wane in response to monetary policy innovations that bring down yields on sovereign bonds. The reaction of economic activity to shocks to monetary policy appears to determine the fiscal stance, rather than the adjustment of borrowing cost.
    Keywords: Euro area periphery countries,fiscal policy,market discipline,monetary policy shocks,local projections
    JEL: E52 E62 H62
    Date: 2021
  3. By: Georgios Georgiadis (European Central Bank); Helena Le Mezo (European Central Bank); Arnaud Mehl (European Central Bank); Cédric Tille (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory ‒ i.e. strategic complementarities in price setting and integration in cross-border value chains ‒ underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro.
    Keywords: International trade invoicing; dominant currency paradigm; markets vs. policies
    JEL: F14 F31 F44
    Date: 2021–07–01
  4. By: Ángel Luis Gómez (Banco de España); Ana del Río (Banco de España)
    Abstract: The economic impact of the COVID-19 pandemic has been uneven across euro área countries. Among the factors explaining this are the intensity of the health crisis in each territory and the severity and duration of the containment measures applied to limit the spread of the virus, as well as the structural differences between the economies, and, in particular, their productive specialisation. The empirical analysis presented in this paper indicates that the variation of the economic impact of the pandemic across euro área countries is largely explained by the relative importance of the most vulnerable service industries – those involving greater face-to-face social interaction – and the capacity to implement teleworking.
    Keywords: COVID-19, economic impact, productive structure, mobility restriction
    JEL: E01 E32 F00
    Date: 2021–06
  5. By: Matthieu PICAULT; Julien PINTER; Thomas RENAULT
    Keywords: , central bank communication, European Central Bank, textual analysis, inflation expectations
    Date: 2021
  6. By: Feld, Lars P.; Reuter, Wolf Heinrich
    Abstract: Germany introduced a new fiscal rule, the 'debt brake', after the Global Financial Crisis and since then experienced a strong decline in its public debt to GDP ratio until the coronavirus pandemic struck. The past ten years and the reaction to the current crisis in Germany illustrate the intended effects of fiscal rules very well. Debt ratios are reduced during normal economic times, such that fiscal policy can forcefully counteract a severe crisis. Escape clauses are therefore an essential part of the design of fiscal rules. Much of the success of fiscal rules depends on the public and political acceptance of the fiscal rules and thus high political costs of not complying with them. Furthermore, the design and framework of the rules among others by restricting cyclically adjusted figures and a strong legal anchoring are important. It will be important for Germany and other economies to repeat the reduction in the debt to GDP ratio in order to be prepared for the next unexpected crisis. This also means improving the design and framework of fiscal rules, e.g., by making the cyclical adjustment less uncertain and susceptible to revisions, improving the transparency of fiscal policy and rule compliance, as well as discussing as to how fiscal rules can contribute to improving the quality of public finances. However, an abolishment of fiscal rules would hamper the ability of fiscal policy to cope with the long-term challenges and to prepare for unexpected short-term challenges.
    Keywords: Public Debt,Fiscal Policy,Fiscal Rules
    JEL: H62 H63 D78
    Date: 2021
  7. By: António Afonso; José Carlos Coelho
    Abstract: We study the relationship between the government budget balance and the current account balance for Portugal, using quarterly data from 1999 to 2019. On the one hand, the causality tests find a unidirectional relation running from the current account balance to the government budget balance. On the other hand, IV estimations show a bi-directional relationship between these variables, and the existence of a bilateral relationship between the structural components of both balances. Even so, the policy implication is that the use of fiscal policy to correct the external imbalance, especially in an economic crisis, is not substantial, due to the small size of the estimated impact. In addition, with an ARDL model, we find a negative long run relationship between the share of public consumption on GDP and the current account balance. As expected, the variation of real public consumption produces an adverse accumulated response on the current account balance. Finally, the investment rate negatively affects the cyclical component of the current account balance and contributes to the structural improvement of the budget balance.
    Keywords: budget balance; external balance; current account targeting hypothesis; twin deficits; government consumption; ARDL; causality; VAR; Portugal
    JEL: F32 F41 H62 C22
    Date: 2021–06
  8. By: André Teixeira; Zoë Venter
    Abstract: This paper shows that the recent surge in savings is a result of tighter macroprudential policy. Using a difference-in-differences approach with staggered treatment adoption, we find that households in EU countries that adopted macroprudential policy between 2000 and 2019 increased their savings up to one third more than households in countries without macroprudential policy. Furthermore, our results indicate that the loan-to-value ratio explains most of the variation on savings. Finally, we find that a longer exposure to macroprudential policy exacerbates savings with searing consequences on growth.
    Keywords: Macroprudential policy, savings, growth, difference-in-differences
    JEL: E21 E52 O47
    Date: 2021–06
  9. By: Costantiello, Alberto; Laureti, Lucio; Leogrande, Angelo
    Abstract: In this article we estimate the imports of goods in European countries in the period 2010-2019 for 28 countries. We use Panel Data with Fixed Effects, Panel Data with Random Effects, Pooled OLS, WLS. Our results show that “Imports of Goods” is negatively associated with “Private Consumption Expenditure at Current Prices”, “Consumption of Fixed Capital”, and “Gross Domestic Product” and positively associated with “Harmonised consumer price index” and “Gross Operating Surplus: Total Economy”. Finally, we compare a set of predictive models based on different machine learning techniques using RapidMiner, and we find that “Gradient Boosted Trees”, “Random Forest”, and “Decision Tree” are more efficient then “Deep Learning”, “Generalized Linear Model” and “Support Vector Machine”, in the sense of error minimization, to forecast the degree of “Imports of Goods”.
    Keywords: General Trade, Global Outlook, International Economic Order and Integration, Empirical Studies of Trade, Trade Forecasting and Simulation.
    JEL: F00 F01 F02 F14 F17
    Date: 2021–07–05
  10. By: Marcell Göttert; Robert Lehmann
    Abstract: In this paper, we disentangle tax revenue forecast errors into influences stemming from wrong macroeconomic assumptions and false predictions of the elasticities linking the tax base to its corresponding tax type. Across six tax types and the overall tax sum for Germany, we find a heterogeneous degree of relative importance of both sources. Whereas wrong macroeconomic assumptions matter most for profit-related taxes and the wage tax, false predictions of the elasticities mainly drive the forecast errors of the energy tax and the sales taxes. For the overall tax sum, more than two-third of the error can be attributed to wrong macroeconomic predictions and approximately one-third to false assumptions on the elasticity. Our results suggest that outsourcing the macroeconomic projections to an independent forecaster and methodological improvements can reduce tax revenue forecast errors.
    Keywords: tax revenue forecasting, tax elasticity, unbiasedness, forecast errors
    JEL: H29 H68 H69
    Date: 2021

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