nep-eec New Economics Papers
on European Economics
Issue of 2021‒10‒11
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Tracking growth in the euro area subject to a dimensionality problem By Comunale, Mariarosaria; Mongelli, Francesco Paolo
  2. The macroeconomic impact of euro area labour market reforms: evidence from a narrative panel VAR By Rünstler, Gerhard
  3. 60%, -4% and 6%, a tale of thresholds for EU fiscal and current account developments By António Afonso; José Carlos Coelho
  4. The effect of Brexit on British workers living in the EU By Ana Venâncio; João Pereira dos Santos
  5. Has the Comprehensive Assessment made the European financial system more resilient? By Calo, Silvia; Gregori, Wildmer Daniel; Petracco Giudici, Marco; Rancan, Michela
  6. Banks' risk-taking within a banking union By Farnè, Matteo; Vouldis, Angelos
  7. Structural Change and Productivity Growth in Europe - Past, Present and Future By Georg Duernecker; Miguel Sanchez-Martinez
  8. Pairs Trading In The Index Options Market By Marianna Brunetti; Roberta De Luca
  9. The Effects of the Covid-19 Pandemic on Stock Markets, CDS and Economic Activity: Time-Varying Evidence from the US and Europe By Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Coskun Akdeniz; Ali Ilhan
  10. Do liquidity limits amplify money market fund redemptions during the COVID crisis? By Dunne, Peter G.; Giuliana, Raffaele
  11. Central bank communication with non-experts: a road to nowhere? By Ehrmann, Michael; Wabitsch, Alena
  12. Reserve tiering and the interbank market By Lucas Marc Fuhrer; Matthias Jüttner; Jan Wrampelmeyer; Matthias Zwicker

  1. By: Comunale, Mariarosaria; Mongelli, Francesco Paolo
    Abstract: We investigate which variables have supported growth in the euro area over the last 30 years. This is a challenging task due to dimensionality problems: a large set of potential determinants, limited data, and the prospect that some variables could be non-stationary. We assemble a set of 35 real, financial, monetary, and institutional variables for nine of the original euro area countries covering the period between 1990Q1 and 2016Q4. Using the Weighted-Average Least Squares method, we gather clues about which variables to select. We quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of EU institutional integration on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run, as well as a decline in sovereign and systemic stress. Debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to non-financial corporations positively affect the core euro area. An increase in global GDP also supports growth in the euro area. JEL Classification: C23, E40, F33, F43
    Keywords: euro area, fiscal policy, GDP growth, institutional integration, institutional reforms, monetary policy, systemic stress
    Date: 2021–09
  2. By: Rünstler, Gerhard
    Abstract: Using new quarterly narrative evidence, this paper examines the macroeconomic impact of reforms of unemployment benefits (UB) and employment protection legislation (EPL) in the euro area from a Bayesian narrative panel VAR. The approach complements existing micro-econometric evidence by aligning short- and mediumterm effects in a unified framework and assessing state dependencies. Liberalising reforms result in temporary wage declines and highly persistent increases in economic activity and employment. In contrast to UB reforms, the effects of EPL reforms on employment emerge only gradually. JEL Classification: E32, J08, O43
    Keywords: discriminant regression, employment protection legislation, narrative identification, unemployment benefits
    Date: 2021–10
  3. By: António Afonso (Universidade de Lisboa); José Carlos Coelho (Universidade de Lisboa)
    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: D
    Date: 2021
  4. By: Ana Venâncio; João Pereira dos Santos
    Abstract: The effect of Brexit is an important topic in the European and British political agendas. This study examines the perspective of the EU countries, with regards how British citizens working in an EU country reacted to the end of free movement of workers. Employing synthetic control methods and using data from Portugal, we estimate how the behaviour of UK citizens working in Portugal would have evolved if the Remain vote had won the referendum. Our results suggest that the Brexit referendum reduced the number of UK citizens working in Portugal, particularly in the case of non-university educated, male individuals with temporary employment contracts. This reduction is explained by the decrease in the number of incomers. We also find that those UK citizens who were already working in Portugal before Brexit are less likely to leave the country.
    Keywords: Brexit, employment, migration
    JEL: J10 J61 J68
    Date: 2021–09
  5. By: Calo, Silvia (Central Bank of Ireland); Gregori, Wildmer Daniel (European Commission); Petracco Giudici, Marco (European Commission); Rancan, Michela (Marche Polytechnic University)
    Abstract: What has been the impact of the Comprehensive Assessment (CA) carried out by the ECB on banks' resilience? Implementing a difference-indifference approach, we analyse a non-risk based measure defined as the ratio of Tier 1 capital over total assets of European banks’ balance sheets during the years 2007-2018. This wide time span, compared to previous literature, allows a better analysis of CA's medium-term effects. We find that banks under the CA have a higher ratio, suggesting that the CA has contributed to foster banks' resilience. Importantly, this seems to have been achieved by banks increasing their capitalization level without shrinking their assets. In addition, this impact appears to be driven by banks located in countries where the regulatory environment and property rights are relatively less strong.
    Keywords: Comprehensive assessment, European banks, Financial stability, Regulation
    JEL: G21 G28
    Date: 2021–08
  6. By: Farnè, Matteo; Vouldis, Angelos
    Abstract: We study the relationship between banks’ size and risk-taking in the context of supranational banking supervision. Consistently with theoretical work on banking unions and in contrast to analyses emphasising incentives underpinned by the too-big-to-fail effect, we find an inverse relationship between banks’ size and non-performing loan growth for a sample of European banks. Evidence is provided that the mechanism operates through the enhanced organisational efficiency of the supranational set-up rather than incentives alignment among the supervisors and the banks. JEL Classification: F33, G21, G28, G32, C20
    Keywords: banking union, euro area, non-performing loans, supervision, too-big-to-fail
    Date: 2021–10
  7. By: Georg Duernecker; Miguel Sanchez-Martinez
    Abstract: This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.
    Keywords: structural change, productivity growth, Baumol’s cost disease, service sector, European Union
    JEL: O41 O47 O52
    Date: 2021
  8. By: Marianna Brunetti (DEF and CEIS, Università di Roma "Tor Vergata"); Roberta De Luca (Bank of Italy)
    Abstract: We test the Index options market efficiency by means of a statistical arbitrage strategy, i.e. pairs trading. Using data on five Stock Indexes of the Euro Area, we first identify any potential option mispricing based on deviations from the long-run relationship linking their implied volatilities. Then, we evaluate the profitability of a simple pair trading strategy on the mispriced options. Despite the signals of potential mispricing are frequent, the statistical arbitrage does not produce significant positive returns, thus providing evidence in support of Index Option market efficiency. The time-to-maturity of the options involved in the trade as well as financial market turbulence have a marginal effect on the eventual strategy returns, which are instead mostly driven by the moneyness of the options traded. Our results remain qualitatively unchanged if a stricter definition of reversion to the equilibrium is applied or when the long-run relationship is estimated on an (artificially derived) time series of options prices rather than on options’ implied volatilities.
    Keywords: pairs trading,option market efficiency
    JEL: G10 G12 C44 C5
    Date: 2021–09–02
  9. By: Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Coskun Akdeniz; Ali Ilhan
    Abstract: This paper examines the effects of the COVID-19 pandemic on stock returns, CDS and economic activity in the US and the five European countries (the UK, Germany, France, Italy, and Spain) which have been most affected. The sample period covers the dates from the first confirmed COVID-19 cases in these countries to February 19, 2021. Specifically, we estimate first benchmark linear VAR models and then, given the evidence of parameter instability, TVP-VAR models with stochastic volatility which are ideally suited to capturing the changing dynamics in both financial markets and the real economy. The empirical findings can be summarised as follows. The linear VAR responses of electricity consumption (a proxy for real economic activity) to a one-standard-deviation shock to the number of COVID-19 cases are statistically insignificant, except for France, whilst the CDS ones are positive and significant only in a few periods, and there are very mixed results for those of stock returns. As for the TVP-VAR results, these indicate that COVID-19 cases had a negative and significant effect on economic activity in all countries in the early stages of the pandemic (especially in Italy), and a positive one on CDS at the same time (with cross-country differences). Finally, the negative impact on stock markets was felt only initially and it had tapered off by mid-April 2020.
    Keywords: Covid-19, stock markets, CDS, economic activity, TVP-VAR
    JEL: G10 G14 G15
    Date: 2021
  10. By: Dunne, Peter G.; Giuliana, Raffaele
    Abstract: Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption-liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress. JEL Classification: G01, G15, G23, G28, G18, G20, F30
    Keywords: liquidity limits, money market funds
    Date: 2021–10
  11. By: Ehrmann, Michael; Wabitsch, Alena
    Abstract: Central banks have intensified their communication with non-experts – an endeavour which some have argued is bound to fail. This paper studies English and German Twitter traffic about the ECB to understand whether its communication is received by non-experts and how it affects their views. It shows that Twitter traffic is responsive to ECB communication, also for non-experts. For several ECB communication events, Twitter constitutes primarily a channel to relay information: tweets become more factual and the views expressed more moderate and homogeneous. Other communication events, such as former President Draghi’s “Whatever it takes” statement, trigger persistent traffic and a divergence in views. Also, ECB-related tweets are more likely to get retweeted or liked if they express stronger or more subjective views. Thus, Twitter also serves as a platform for controversial discussions. The findings suggest that central banks manage to reach non-experts, i.e. their communication is not a road to nowhere. JEL Classification: E52, E58
    Keywords: central bank communication, monetary policy, non-experts, social media
    Date: 2021–10
  12. By: Lucas Marc Fuhrer; Matthias Jüttner; Jan Wrampelmeyer; Matthias Zwicker
    Abstract: Since the financial crisis, major central banks have introduced negative interest rates with the help of tiered reserve remuneration. We theoretically and empirically investigate monetary policy implementation via reserve tiering using a unique bank-level dataset from Switzerland. We find that reserve tiering can successfully be used to steer short-term interest rates. Furthermore, reserve tiering helps maintain sufficient activity in the interbank market, which is key for financial stability and reliable interest rate benchmarks. Due to frictions such as collateral constraints, trading costs, and window dressing around regulatory reporting dates, not only the aggregate level of reserves but also the reserve distribution matters for monetary policy implementation.
    Keywords: Interbank market, reserve tiering, negative rates, monetary policy
    JEL: E43 E58 G12 G21
    Date: 2021–09–27

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