nep-eec New Economics Papers
on European Economics
Issue of 2021‒08‒09
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The growth-at-risk perspective on the system-wide impact of Basel III finalisation in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
  2. Corporate loans, banks’ internal risk estimates and central bank collateral: evidence from the euro area By Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
  3. A digital euro: a contribution to the discussion on technical design choices By Emanuele Urbinati; Alessia Belsito; Daniele Cani; Angela Caporrini; Marco Capotosto; Simone Folino; Giuseppe Galano; Giancarlo Goretti; Gabriele Marcelli; Pietro Tiberi; Alessia Vita
  4. Risky mortgages, credit shocks and cross-border spillovers By Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier
  5. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  6. A new fiscal policy for Germany By Philippa Sigl-Gloeckner; Max Krahé; Pola Schneemelcher; Florian Schuster; Viola Hilbert; Henrika Meyer
  7. Output expectations, uncertainty and the UK business cycle; Evidence from the CBI's suite of business surveys By Kevin Lee; Michael Mahony; Paul Mizen
  8. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  9. Impact of EU-wide Insurance Stress Tests on Equity Prices and Systemic Risk By Petr Jakubik; Saida Teleu
  10. Fiscal targeting By Régis Barnichon; Geert Mesters
  11. Catch me (if you can): assessing the risk of SARS-CoV-2 transmission via euro cash By Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
  12. Trends in subjective income poverty rates in the European Union By Želinský, Tomáš; Mysíková, Martina; Garner, Thesia I.
  13. Increased trade with China and Eastern Europe hardly affects Dutch workers By Rob Euwals; Harro van Heuvelen; Gerdien Meijerink; Jan Möhlmann; Simon Rabaté
  14. Energy footprints and the international trade network: A new dataset. Is the European Union doing it better? By Fernández-Amador, Octavio; Francois, Joseph; Oberdabernig, Doris; Tomberger, Patrick
  15. Learning from Tumultuous Times - An Analysis of Vulnerable Sectors in International Trade in the Context of the Corona Health Crisis By Oliver Reiter; Robert Stehrer

  1. By: Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper assesses the macroeconomic implications of the Basel III finalisation for the euro area, employing a large-scale semi-structural model encompassing over 90 banks and 19-euro area economies. The new regulatory framework will influence banks’ reactions to economic conditions and, as a result, affect the ability of the banking system to amplify or dampen economic shocks. The assessment covers the entire distribution of conditional economic predictions to measure the cost and benefit of the reforms. Looking at the means of conditional forecasts of output growth provides an indication of the costs of the reform, namely a transitory reduction in euro area gross domestic product (GDP) and in lending to the non-financial private sector. Looking at the lower percentile of output growth forecasts, i.e. growth at risk, captures the long-term benefits of the Basel III finalisation package in terms of improved resilience and the ability of the banking system to supply lending to the real economy under adverse conditions. These permanent growth-at-risk benefits ultimately outweigh the short-term costs of the reform. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, Basel III finalisation, impact assessment, real-financial feedback mechanism, regulatory policy
    Date: 2021–07
  2. By: Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
    Abstract: We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks. JEL Classification: G21, G28
    Keywords: banking regulation, central bank liquidity, internal ratings, probability of default
    Date: 2021–07
  3. By: Emanuele Urbinati (Bank of Italy); Alessia Belsito (Bank of Italy); Daniele Cani (Bank of Italy); Angela Caporrini (Bank of Italy); Marco Capotosto (Bank of Italy); Simone Folino (Bank of Italy); Giuseppe Galano (Bank of Italy); Giancarlo Goretti (Bank of Italy); Gabriele Marcelli (Bank of Italy); Pietro Tiberi (Bank of Italy); Alessia Vita (Bank of Italy)
    Abstract: In the last decade, the advent of new technologies has dramatically changed the banking and financial ecosystem. Financial operators have transformed their services in the context of the Fintech phenomenon; households’ payment habits are rapidly changing as well, embracing the revolution brought by the digital innovations. In this context, a number of central banks are devoting significant resources to examining the feasibility of introducing a digital currency as a complement to physical money. After an introduction that illustrates the main characteristics defining a Central Bank Digital Currency (CBDC), the paper presents ongoing CBDC-related work around the globe, discusses how a digital currency could support a central bank in performing its functions, and analyses its key features. The paper then illustrates a possible digital euro solution based on the integration of an account-based platform with a DLT-based one. The integration of these two components would make it possible to reap the benefits of two complementary solutions, reciprocally balancing their advantages and disadvantages, as regards, for instance, privacy. Finally, the paper presents the findings of experiments on the digital euro carried out by experts of the euro-area National Central Banks and the ECB; according to the results of those experiments, the integration of an account-based platform with a DLT-based one may provide a sound basis on which to build a fully-fledged solution, capable of meeting both regulatory and retail users’ needs.
    Keywords: digital euro, payment systems, financial market infrastructure, blockchain
    JEL: E42
    Date: 2021–07
  4. By: Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier
    Abstract: This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 18 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy. JEL Classification: C32, F47, G21, G51
    Keywords: borrower-based measures, cross-border spillovers, LTV limits, Mortgage rating
    Date: 2021–08
  5. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. JEL Classification: E31, E32, E37, E52, E58
    Keywords: asset purchases, effective lower bound, forward guidance, make-up strategies, monetary policy
    Date: 2021–07
  6. By: Philippa Sigl-Gloeckner (Dezernat Zukunft); Max Krahé (Dezernat Zukunft); Pola Schneemelcher (Dezernat Zukunft); Florian Schuster (Universitaet zu Koeln); Viola Hilbert (Deutschen Instituts fuer Wirtschaftsforschung (DIW)); Henrika Meyer (Mercator Research Institute for Global Commons and Climate Change)
    Abstract: The sustainability of public finances should be measured by the debt-to-GDP ratio; the debt-to-GDP ratio is best controlled by keeping the deficit in check. For decades, these ideas shaped German fiscal policy. In 2009, with the introduction of the debt brake, this approach found its way into the German constitution. Recent research, however, has shown that this paradigm yields suboptimal results in the current environment: It neither ensures the long-term sustainability of public finances, nor limits external imbalances, nor effectively contributes to solving the challenges Germany faces today, in particular decarbonisation and demographic change. As this is increasingly being recognised, a lively debate on the future of fiscal rules has developed, both in Germany and internationally. This working paper contributes to that debate by developing reform ideas that depart from a positive goal for fiscal policy rather than from the deficiencies of the current rules. The paper starts off with an overview over the current reform debate. Following this literature review, three closely related questions are answered: what is the right objective for fiscal policy? What might an institutional framework look like to put this objective into practice? And what concrete, politically realistic reform options could move us in that direction? In response to the three questions, we identify sustainable full capacity utilisation of the economy as a sound objective for fiscal policy; make a proposal for a framework consisting of four components; and develop detailed proposals for initial re-form steps to begin implementing this framework in Germany, including an adjustment of the cyclical component of the debt brake (governed by ordinary law), introducing an investment fund for municipal investments, and adding a watchman indicator for rising interest costs.
    Keywords: Fiscal Policy, Fiscal Rules, Debt Brake, Debt Management
    JEL: E62 E02 H62 H63
    Date: 2021–06
  7. By: Kevin Lee; Michael Mahony; Paul Mizen
    Abstract: Novel methods are used to produce quantitative measures of output expectations and output uncertainties in the UK based on the information provided by the CBI business surveys since 2000. These are employed alongside actual output data in an analysis of the source of innovations and propagation mechanisms underlying output dynamics. The coverage of the surveys (conducted separately for the manufacturing, distributive trade and service sectors) and the sample length (covering the periods before and after the Financial Crisis and through the Brexit period) means the analysis provides a compelling characterisation of UK business cycle experiences over the last twenty years.
    Keywords: business cycles; survey data; expectations; uncertainty
    Date: 2020
  8. By: Coleman, Winnie; Nautz, Dieter
    Abstract: Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation,Online Surveys,Covid-19 Pandemic
    JEL: E31 E52 E58
    Date: 2021
  9. By: Petr Jakubik (European Insurance and Occupational Pensions Authority (EIOPA), Germany; Charles University in Prague, Faculty of Social Sciences, Institute of Economic Studies, Czech Republic); Saida Teleu (Maltese Financial Services Authority, Malta; Charles University in Prague, Faculty of Social Sciences, Institute of Economic Studies, Czech Republic)
    Abstract: Since the global financial crisis in 2007, stress tests have become standard tools for regulators and supervisors to assess the risks and vulnerabilities of financial sectors. To this end, the Insurance and Occupational Pensions Authority (EIOPA) regularly performs EU-wide insurance stress tests. This paper analyses the impact of the conducted exercises in 2014, 2016 and 2018 on the equity prices of insurance companies. Using an event study framework, we find a statistically significant impact only for the publication of the 2018 exercise results. Our empirical analysis further suggests that the final version of technical specifications for the 2014 exercise, the initiation of public consultation, and the published stress test scenario of the 2018 exercise contributed to the decline in systemic risk. To our best knowledge, this is the first paper that investigates this topic for the European insurance sector. Our empirical results could help improve the communication and design of future stress test exercises.
    Keywords: European insurance sector; EU-wide insurance stress test, systemic risk, event study, equity prices
    JEL: G23 G12 G14 G18
    Date: 2021–07
  10. By: Régis Barnichon; Geert Mesters
    Abstract: Fiscal rules are widely used to constrain policy decisions and promote fiscal discipline, but the design of flexible yet effective rules has proved a formidable task. In this paper, we propose to implement fiscal constraints through a fiscal targeting framework, paralleling central banks' move from monetary rules to inflation targeting. Under fiscal targeting, fiscal policy makers must optimally balance some fiscal objectives (e.g., keeping the deficit below 3%) with their own policy objectives (e.g., stabilizing output at potential). Fiscal targeting can be implemented with minimal assumption on the underlying economic model, and it promises a number of benefits over commonly used fiscal rules: (i) stronger buy-in from policy makers, (ii) higher fiscal discipline, (iii) transparency and ease of monitoring.
    Keywords: Fiscal rule, impulse responses, forecasting, stability and growth pact.
    JEL: C14 C32 E32 E52
    Date: 2021–07
  11. By: Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
    Abstract: In the light of fears that the SARS-CoV-2 virus might be transmitted via cash – fears that were stoked by statements in the media and from public authorities – this paper aims to address the following issues: (1) to provide a descriptive account of the change in the circulation of euro banknotes and the use of cash in transactions during the pandemic; and (2) to assess the survivability of the virus on cash and the potential transmission risks. The pandemic has caused a significant increase in demand for cash as a store of value but a decrease in the use of cash in transactions. Although citizens reported using cash less in transactions partly out of fear of infection, research confirms that the risk of the virus being transmitted by banknotes and coins is very low. This supports the findings from the scientific community concluding that SARS-CoV-2 mainly spreads via respiratory fluids and airborne transmission, and that surfaces play a very minor role. JEL Classification: I10, I12, E41, E58
    Keywords: banknotes, cash demand, cash use, coins, COVID-19 pandemic, safety, SARS-CoV-2 virus, survivability, transferability
    Date: 2021–07
  12. By: Želinský, Tomáš; Mysíková, Martina; Garner, Thesia I.
    Abstract: When developing anti-poverty policies, policy makers need accurate data on the prevalence of poverty. In this paper, we focus on subjective poverty, a concept which has been largely neglected in literature, yet remains a conceptually appealing way to define poverty. The primary goal of this study is to re-examine the concept of subjective poverty measurement and to estimate trends in subjective poverty rates in the European Union. Our estimations are based on a minimum income question using data from a representative survey, EU-SILC, and we find a decreasing trend in subjective poverty in 16 of 28 countries. Conversely, the official relative income poverty indicator exhibits increasing trends in eleven countries, with decreasing trends in only four countries. We believe that these trends may reflect changes in societies which have not been previously captured, and our results thus enrich the existing data on general poverty trends in the EU.
    Keywords: Subjective poverty,Minimum Income Question,intersection approach,EU-SILC,European Union
    JEL: I31 I32
    Date: 2021
  13. By: Rob Euwals (CPB Netherlands Bureau for Economic Policy Analysis); Harro van Heuvelen (CPB Netherlands Bureau for Economic Policy Analysis); Gerdien Meijerink (CPB Netherlands Bureau for Economic Policy Analysis); Jan Möhlmann (CPB Netherlands Bureau for Economic Policy Analysis); Simon Rabaté (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Contrary to other studies, we find no robust effect of an increase in trade with China and Central European (CEE) countries on local employment, wages and inequality in the Netherlands. If there is an effect, it is small, with positive effects of increased exports counteracting the negative effects of increased imports. One of the reasons why we find different results for the Netherlands is the fact that the Dutch manufacturing industry was already undergoing changes well before the emergence of China and the CEE countries and became less sensitive to import competition from China or the CEE countries. In addition, the Netherlands has collective wage negotiations, which may help to explain that we do not find any effects on wages. While the effect of increased trade with China and the CEE countries on manufacturing jobs is limited, it can create uncertainty for workers. The negative effect of import competition and the positive impact of export opportunities on manufacturing jobs also point to adjustments across industries and regions. Transitioning workers to new types of work can be difficult for these workers, as they are (temporarily) unemployed and may need to move to other regions.
    JEL: F16 J31 R11
    Date: 2021–07
  14. By: Fernández-Amador, Octavio; Francois, Joseph; Oberdabernig, Doris; Tomberger, Patrick
    Abstract: Abstract: Understanding the global energy network and the developments of energy efficiency is key to advance energy regulation and fight climate change. We develop a global panel dataset on energy usage inventories based on territorial production, final production and consumption over 1997-2014. We apply structural decomposition analysis to isolate energy efficiency changes and study the effectiveness of the European Union Energy Services Directive (2006/32/EC) on energy efficiency. High-income regions are net-importers of embodied energy and use a larger share of non-renewable energy than developing countries. The effectiveness of the Directive is mixed. The different ambition of national energy policies of the European Union members and some complementarity in supply chains underlie the different dynamics found. High-income countries share efficiency gains and changes in the mix of energy sources. These trends are not specific to the European Union. Energy policies in high-income countries are less effective for energy footprints. Our findings are indicative of energy leakage. Energy regulation should account for global supply chains and target energy footprints.
    Keywords: Energy usage, energy efficiency, energy footprints, renewable energy, MRIO analysis, Structural Decomposition Analysis, EU Energy Services Directive. Click on the link below to read the full paper.
    Date: 2021–08–03
  15. By: Oliver Reiter (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The COVID-19 pandemic marks an unprecedented shock to global growth and trade and brought international dependencies into the spotlight. This triggered discussions on resilience and robustness of global value chains. In this paper we assess which products can be considered as vulnerable to trade shocks at the global level – referred to as ‘risky’ products – by constructing a ‘product riskiness indicator’ for 4700 globally traded products based on components such as market concentration, clustering tendencies, network centrality of players, or international substitutability. In a second step the bilateral imports of risky products are matched to multi-country input-output tables enabling the analysis of the importance of internationally sourced risky products by country and using industries. Higher-tech industries are more prone to supply-chain vulnerability given the large share of risky products in high-tech product categories. Third, we apply a ‘partial global extraction method’ to assess the GDP impact of reshoring. Assuming that imports of risky products are re-shored from non-EU27 to EU27 countries suggests an increase in the EU27 GDP of up to 0.5%. The non-EU27 countries lose from such re-shoring activities accordingly. This suggests that it is also in the interest of the supplier countries and industries to assure robust or at least resilient supply chains. Finally, selected policy aspects in the context of the envisaged EU Open Strategic Autonomy are debated.
    Keywords: supply chains, vulnerability, resilience, robustness, global extraction method
    JEL: F14 F17 F52
    Date: 2021–07

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.