nep-eec New Economics Papers
on European Economics
Issue of 2021‒10‒04
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroprudential policy and the sovereign-bank nexus in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  2. Analysing euro area inflation outlook with the Phillips curve By Oinonen, Sami; Vilmi, Lauri
  3. 60%, -4% and 6%, a tale of thresholds for EU fiscal and current account developments By António Afonso; José Carlos Coelho
  4. From SMP to PEPP: a further look at the risk endogeneity of the Central Bank By Marco Fruzzetti; Giulio Gariano; Gerardo Palazzo; Antonio Scalia
  5. The effects of the ECB's pandemic-related monetary policy measures By Nelimarkka, Jaakko; Laine, Olli-Matti
  6. The Bias and Efficiency of the ECB Inflation Projections: a State Dependent Analysis By Eleonora Granziera; Pirkka Jalasjoki; Maritta Paloviita
  7. (Mis)Measuring Competitiveness: The Quantification of a Malleable Concept in the European Semester By Claudius Graebner-Radkowitsch; Theresa Hager
  8. Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  9. Have European Banks left tax haven? Evidence from country-by-counry data By Giulia Aliprandi; Mona Baraké; Paul-Emmanuel Chouc
  10. Towards ISEW and GPI 2.0, part I: developing two alternative measures of economic welfare with distinct time and boundary perspectives for Belgium By Jonas Van der Slycken; Brent Bleys
  11. Peer Monitoring vs. Search Costs in the Interbank Market: Evidence from Payment Flow Data in Norway By Jon H. Findreng
  12. The Impact of Venture Capital Expenditures on Innovation in Europe By Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio

  1. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We explore how changes in capital-based macroprudential regulation affect theexposure of national banking sectors to domestic government debt in the euro area,thus strengthening or weakening the sovereign-bank nexus. To do so, we construct ameasure of macroprudential policy based on theMacroprudential Policy EvaluationDatabaseand estimate responses to theunsystematiccomponent of macroprudentialpolicy in panel vector autoregressive models for euro area 'core" and 'periphery"countries. Our main finding suggests that an unsystematic capital-based macro-prudential policy tightening increases banks' exposure to domestic sovereign bondsin the periphery countries and so deepens the sovereign-bank nexus. By contrast,banks in the core countries expand their loan portfolios rather than adjusting theirdomestic sovereign bond holdings in response to the shock. We show that this re-sult can be tied to the theoretical literature and investigate several transmissionchannels. Our results are highly robust to changes in the econometric setup and themacroprudential indicator used.
    Keywords: macroprudential policy,euro area,sovereign-bank nexus,panel vector autore-gressive model
    JEL: C33 G21 G28
    Date: 2021
  2. By: Oinonen, Sami; Vilmi, Lauri
    Abstract: This paper presents the New Keynesian Phillips Curve (NKPC) -based framework for analysing euro area inflation outlook. Our NKPC specification, that relies on market- and survey-based inflation expectations, explains well euro area inflation dynamics. Its forecasting performance is also comparable to the performance of the ECB's official forecasts in both short- and long-horizons. Overall, the NKPC is a useful tool for monitoring euro area inflation outlook. Thanks to its fast and light updating procedure it provides almost real-time information on inflation outlook.
    Keywords: euro area,inflation expectations,inflation forecasting,Phillips curve
    JEL: E31 E37
    Date: 2021
  3. By: António Afonso; José Carlos Coelho
    Abstract: We study the relationship between the budget balance and the current account balance for European Union (EU) countries, using quarterly data from 1995 to 2020. Through the use of panel Granger causality tests and a panel SUR model, we conclude that the relationship is bi-directional for the EU panel as a whole. Furthermore, we find that in Eurozone countries, before 2010, for those countries with an average current account balance-to-GDP ratio outside the range of -4 to 6%, and also in countries whose average debt-to-GDP ratio is greater than 60%, the impact of the budget balance on the current account balance is greater. Conversely, in non-Eurozone countries, after 2010, in countries with a current account balance-to-GDP ratio of -4 to 6%, and also in countries with an average debt-to-GDP ratio of less than 60%, the impact of the fiscal balance on the current account balance is less relevant.
    Keywords: budget deficit; external deficit; European Union; panel data; time series
    JEL: F32 F41 H62 C32 C33
    Date: 2021–09
  4. By: Marco Fruzzetti (Bank of Italy); Giulio Gariano (Bank of Italy); Gerardo Palazzo (Bank of Italy); Antonio Scalia (Bank of Italy)
    Abstract: This paper examines the evolution of credit risk arising from monetary policy operations and ELA on the Eurosystem balance sheet over the last decade. We employ a dynamic, market-driven risk model relying on the expected default frequencies for sovereigns, banks and corporates provided by Moody’s Analytics. Dependence between defaults is modeled with a multivariate Student t distribution with time-varying parameters. We find that at the end of 2020, risk is slightly above its average value in 2010 and approximately equal to one quarter of the value measured at the peak of the sovereign debt crisis in 2012, notwithstanding the threefold increase in the Eurosystem monetary policy exposure occurred since then. This is due to the launch of the OMT and PEPP, which succeeded in quelling market turmoil, thereby reducing the Eurosystem’s own balance sheet credit risk. The OMT in particular has had a long lasting effect in lowering sovereign risk in the euro area. Our findings support the view that, in periods of severe financial distress, risk for a central bank is largely endogenous.
    Keywords: financial risk measurement, unconventional monetary policy, ELA, sovereign risk, Eurosystem financial risk
    JEL: E58 E52 C15
    Date: 2021–10
  5. By: Nelimarkka, Jaakko; Laine, Olli-Matti
    Abstract: We assess the macroeconomic impact of pandemic-related monetary policy measures of the ECB. Conditioning on counterfactual interest rate paths that would have materialised in the absence of the policies, the macroeconomic effects are measured using structural vector autoregressions. In the framework, multiple monetary policy measures may simultaneously be analysed. According to our results, the asset purchase programmes implemented during the crisis have increased the annual GDP growth by approximate 2 percentage points in 2020-2021 and inflation by 0.5 percentage points. The longer-term refinancing operations have contributed positively but more mildly to the economic activity.
    Keywords: Monetary policy,Covid-19,ECB,structural VAR,policy evaluation
    JEL: C32 C54 E43 E52 E58
    Date: 2021
  6. By: Eleonora Granziera; Pirkka Jalasjoki; Maritta Paloviita
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    Keywords: forecast evaluation, forecast eciency, ination forecasts, central bank communication
    JEL: C12 C22 C53 E31 E52
    Date: 2021–04–28
  7. By: Claudius Graebner-Radkowitsch (Institute for Socio-Economics, University of Duisburg-Essen, Germany; Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Theresa Hager (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria)
    Abstract: This paper studies the conceptualization and quantification of ‘competitiveness’ within the main policy coordination framework of the EU, the European Semester. This topic warrants attention since ‘competitiveness’ is not only of central importance in the European policy discourse, but also a theoretically ambiguous and malleable concept with conflicting accentuations, all of which are subject of considerable academic and political debate. By investigating the translation of competition as a contested theoretical concept into concrete indicators within a legally binding document, the paper produces three main insights that deserve further attention, both scientifically and politically. First, the indicators of the semester mainly measure cost rather than technological competitiveness, indicating a constriction of the concept at the operational level. Second, while EU policy documents regularly stress the competitiveness of the European Union as a whole, the indicators in the semester measure individual country competitiveness. Finally, the indicators in the Semester measure how the competitiveness of single Member States changes over time, not how they perform relative to others. This shallows the heterogeneity of countries, which is problematic given recent findings according to which absolute differentials of competitiveness across Member States is one important driver of accelerating polarization patterns in the Union.
    Keywords: European Union; competition; performativity; European semester; political economy
    Date: 2021–09
  8. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good which can be undermined by sovereign debt problems in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.
    Keywords: Core-periphery models; Stability in a monetary union; Risk sharing; Monetary union institutions; Unconventional policies
    JEL: E02 E58 E63 E65
    Date: 2021–09
  9. By: Giulia Aliprandi (EU Tax - EU Tax Observatory, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, 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); Mona Baraké (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory)
    Abstract: This study documents the activity of European banks in tax havens and how this activity has evolved since 2014. The analysis covers 36 systemic European banks that have been required to publicly report country-by-country data on their activities since 2015. We study the level and evolution of the profits booked by these banks in tax havens over the 2014-2020 period. We also compute their effective tax rates and their tax deficit—defined as the difference between what these banks currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country. We start by creating a list of tax haven jurisdictions used by the banking sector. We combine two indicators to identify tax havens: the effective tax rate on bank profit and the amount of bank profit per employee. Overall, 17 jurisdictions feature in our list: Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar. Using this list, we show that European banks use tax havens significantly, with no trend during the 2014–2020 period. The main European banks book EUR 20 billion (or 14% of their total profits) in tax havens each year. This percentage has been stable since 2014 despite the introduction of mandatory information disclosure. Bank profitability in tax havens is abnormally high: EUR 238 000 per employee, as opposed to around EUR 65 000 in non-haven countries. This suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs. Around 25% of the profits made by the European banks in our sample are booked in countries with an effective tax rate lower than 15%. The use of tax havens varies considerably from bank to bank. The mean percentage of profits booked in tax havens is about 20% and ranges from 0% for nine banks to a maximum of 58%. The mean effective tax rate paid by the banks in our sample is 20%, with a minimum of 10% and a maximum of 30%. Seven banks exhibit a particularly low effective tax rate, below or equal to 15%. To better understand this heterogeneity, we analyse the use of tax havens by three banks with a relatively high presence in tax havens: HSBC, Deutsche Bank, and Société Générale. We observe a diversity of situations: for HSBC, the bulk of haven profits come from just one haven (Hong Kong), while in other cases multiple tax havens are involved. We estimate the amount of revenues that could be collected by applying a minimum tax rate on the profits of banks. We simulate a tax similar to the G20/OECD minimum tax proposal ,which the majority of the Inclusive Framework jurisdictions supported in July 2021. In this proposal each parent country would collect the tax deficit of its own banks. For instance, if the internationally agreed minimum tax rate is 15% and a German multinational bank has an effective tax rate of 10% on the profits it books in Singapore, Germany would impose an additional tax of 5% on these profits to arrive at an effective rate of 15%. We consider three minimum tax rates—15%, 21%, and 25%—and in each case compute the extra tax owed per bank and tabulate results by headquarter country. Our findings show that a minimum tax has significant revenue potential. With a 25% minimum tax rate, our sample of European banks would have to pay EUR 10-13 billion in additional taxes annually. Lower tax rates reduce the gains to EUR 6-9 billion for the 21% tax rate and EUR 3-5 billion for the 15% tax rate. Banks with low effective tax rates—which tend to make use of tax havens to shift profits and lower their tax liability—would be particularly affected. Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance. They also suggest that despite the growing salience of these issues in the public debate and in the policy world, European banks have not significantly curtailed their use of tax havens since 2014. More ambitious initiatives—such as a global minimum tax with a 25% rate—may be necessary to curb the use of tax havens by the banking sector.
    Date: 2021–09
  10. By: Jonas Van der Slycken; Brent Bleys (-)
    Abstract: Scholars have long had difficulties when dealing with cross-time and cross-boundary issues in the ISEW and GPI. As a result, different views exist on how to account for impacts of climate change that are shifted in time and space. This study puts forward a “2.0 methodology” that deals with cross-time and cross-boundary issues in an application to Belgium as a first step to calculate economic welfare in a standardized way for the EU-15 countries. In doing so, we address time and boundary issues by calculating two welfare measures with distinct time and boundary perspectives and introduce a number of improvements to the methodology. Experiential welfare looks at welfare that is currently experienced within domestic borders, whereas the benefits and costs of present activities also include the welfare impacts that are shifted in time and space. The former construct only registers present ecological costs within borders and does not include capital changes, while the latter includes capital changes and ecological cost-shifting. We find that both welfare and GDP improved in Belgium between 1995 and 2018. Yet, we also observe an important divergence: experiential welfare per capita and the benefits and costs of present activities improved by respectively 15% and 18%, while GDP per capita grew by 30%. As we find that for Belgium substantial ecological costs are being shifted in time and space, we suggest to move forward with the latter construct as it tracks these costs in its methodological framework. Furthermore, we also propose to look beyond the aggregate welfare level and adopt a disaggregated and dashboard-like approach to evaluate economic performance in detail.
    Keywords: Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), costshifting, beyond GDP, postgrowth
    Date: 2021–09
  11. By: Jon H. Findreng
    Abstract: Bilateral payment flows between banks may provide private information about a borrowing bank’s liquidity position. This paper analyses whether private information on the bilateral payment flow of central bank reserves foster peer monitoring or whether the information is used to reduce search costs in the unsecured interbank market. In the former, banks with outflows of liquidity are penalized by their counterparties, while in the latter, these banks benefit through reduced search costs to find a liquidity provider. I use data from Norges Bank’s real time gross settlement system over the period 2012 to 2015 to identify unsecured overnight interbank loans and payment flows. The results suggest that banks are using private information from payment flows to reduce search costs and not for peer monitoring. This has important implications for regulators’ assessment of the pros and cons of a centralized versus a decentralized interbank market.
    Keywords: peer monitoring, search cost, unsecured overnight interbank market, interest rates, central bank liquidity policy, OTC markets
    JEL: G21 E42 E43 E58
    Date: 2021–05–29
  12. By: Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio
    Abstract: We investigate the relationship between “Venture Capital Expenditures” and innovation in Europe. Data are collected from the European Innovation Scoreboard for 36 countries in the period 2010-2019. We perform Panel Data with Fixed Effects, Panel Data with Random Effects, Pooled OLS, WLS, Dynamic Panel. Results show that the level of Venture Capitalist Expenditure is positively associated to “Foreign Doctorate Students” and “Innovation Index” and negatively related to “Government Procurement of Advanced Technology Products”, “Innovators”, “Medium and High-Tech Products Exports”, “Public-Private Co-Publications”. In adjunct, cluster analysis is realized with the algorithm k-Means and the Silhouette coefficient, and we found the presence of four different clusters for the level of “Venture Capital Expenditures”. Finally, we propose a confrontation among 8 different algorithms of machine learning to predict the level of “Venture Capital Expenditures” and we find that the linear regression generates the best results in terms of minimization of MAE, MSE, RMSE.
    Keywords: Innovation and Invention: Processes and Incentives, Management of Technological Innovation and R&D, Technological Change: Choices and Consequences, Intellectual Property and Intellectual Capital, Open Innovation, Government Policy.
    JEL: O30 O31 O32 O33 O34 O38 O39
    Date: 2021–09–25

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