nep-eec New Economics Papers
on European Economics
Issue of 2021‒11‒22
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Do inflation expectations improve model-based inflation Forecasts? By Marta Bañbura; Danilo Leiva-León; Jan-Oliver Menz
  2. A Convenient Representation of the Wealth Distribution and More Evidence on Homeownership and Wealth Inequality in Euro Area Countries By Biewen, Martin; Glaisner, Stefan; Kleimann, Rolf
  3. Natural rate chimera and bond pricing reality By Brand, Claus; Goy, Gavin; Lemke, Wolfgang
  4. Brexit: Trade diversion due to trade policy uncertainty By Eduardo Gutiérrez; Aitor Lacuesta; César Martín Machuca
  5. Loan Guarantees, Bank Lending and Credit Risk Reallocation By Carlo Altavilla; Andrew Ellul; Marco Pagano; Andrea Polo; Thomas Vlassopoulos
  6. The COVID-19 Consumption Game-Changer: Evidence from a Large-Scale Multi-Country Survey By Alexander Hodbod; Cars Hommes; Stefanie J. Huber; Isabelle Salle
  7. Institutional Integration and Productivity Growth: Evidence from the 1995 Enlargement of the European Union By Campos, Nauro F.; Coricelli, Fabrizio; Franceschi, Emanuele
  8. The Impact of the ECB Banking Supervision Announcements on the EU Stock Market By Angelo Baglioni; Andrea Monticini; David Peel
  9. Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective By Ruipeng Liu; Rangan Gupta; Elie Bouri
  10. Banks' credit losses and lending dynamics By Raupach, Peter; Memmel, Christoph
  11. Asylum Recognition Rates in Europe: Persecution, Policies and Performance By Hatton, Timothy J.
  12. Quantitative easing, safe asset scarcity and bank lending By Tischer, Johannes
  13. Licence to Dine: 007 and the Real Exchange Rate By Lee A. Craig; Julianne Treme; Thomas J. Weiss
  14. The Effectiveness of Job-Retention Schemes: COVID-19 Evidence From the German States By Mr. Shekhar Aiyar; Mai Chi Dao
  15. Population growth, immigration, and labour market dynamics By Elsby, Michael W.L.; Smith, Jennifer C.; Wadsworth, Jonathan
  16. The Intellectual Assets in Europe By Costantiello, Alberto; Laureti, Lucio; Leogrande, Angelo
  17. The Financial Drivers of Populism in Europe By Luigi Guiso; Massimo Morelli; Tommaso Sonno; Helios Herrera

  1. By: Marta Bañbura (European Central Bank); Danilo Leiva-León (Banco de España); Jan-Oliver Menz (Deutsche Bundesbank)
    Abstract: Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB’s SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019.
    Keywords: forecasting, inflation, inflation expectations, Phillips curve, bayesian VAR
    JEL: C53 E31 E37
    Date: 2021–10
  2. By: Biewen, Martin (University of Tuebingen); Glaisner, Stefan (University of Tübingen); Kleimann, Rolf (IAW Tübingen)
    Abstract: This note proposes a convenient graphical representation of the wealth distribution and illustrates it with data from the Eurosystem Household Finance and Consumption Survey (HFCS). We also present more evidence on the role of homeownership for wealth inequality in euro area countries.
    Keywords: wealth inequality, transformation, homeownership
    JEL: D31 C14 R3
    Date: 2021–11
  3. By: Brand, Claus; Goy, Gavin; Lemke, Wolfgang
    Abstract: We build a novel macro-finance model that combines a semi-structural macroeconomic module with arbitrage-free yield-curve dynamics. We estimate it for the United States and the euro area using a Bayesian approach and jointly infer the real equilibrium interest rate (r*), trend inflation (π*), and term premia. Similar to Bauer and Rudebusch (2020, AER), π* and r* constitute a time-varying trend for the nominal short-term rate in our model, rendering estimated term premia more stable than standard yield curve models operating with time-invariant means. In line with the literature, our r* estimates display a distinct decline over the last four decades. JEL Classification: C11, C32, E43, G12, E44, E52
    Keywords: arbitrage-free Nelson-Siegel term structure model, Bayesian estimation, equilibrium real rate, natural rate of interest, r*, term premia, unobserved components
    Date: 2021–11
  4. By: Eduardo Gutiérrez (Banco de España); Aitor Lacuesta (Banco de España); César Martín Machuca (Banco de España)
    Abstract: During the long process of negotiation after the 2016 Brexit referendum there was a high uncertainty about the final shape of bilateral trade relations between the European Union (EU) and the United Kingdom (UK), especially for particular sectors and firms. Given this context, the paper explores whether a fraction of Spanish trade with the UK was diverted to other markets after the referendum as a function of Spanish firms’ exposition to the British market. The paper shows that firms more exposed to that particular market (above 10% of foreign sales and purchases) were able to almost fully divert the shock in their sales and purchases, mostly to other European countries. Instead, there was an heterogeneous responses of Spanish firms with a low share of British bilateral flows over total trade. Given a particular share, trade diversion appears to be more limited for imports relative to exports and for big companies.
    Keywords: policy uncertainty, Brexit, trade diversion
    JEL: F02 F13 F14 F15 F61 F68
    Date: 2021–11
  5. By: Carlo Altavilla (European Central Bank, CSEF and CEPR); Andrew Ellul (Indiana University, CSEF, CEPR and ECGI); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR and ECGI); Andrea Polo (Luiss University, EIEF, CEPR and ECGI); Thomas Vlassopoulos (European Central Bank)
    Abstract: We investigate whether government credit guarantee schemes, extensively used at the onset of the Covid-19 pandemic, led to substitution of non-guaranteed with guaranteed credit rather than fully adding to the supply of lending. We study this issue using a unique euro-area credit register data, matched with supervisory bank data, and establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms in sectors severely affected by the pandemic, borrowing from large, liquid and well-capitalized banks. Second, guaranteed loans partially substitute pre-existing nonguaranteed debt. For firms borrowing from multiple banks, the substitution mainly arises from the lending behavior of the bank extending guaranteed loans. Substitution was highest for funding granted to riskier and smaller firms in sectors more affected by the pandemic, and borrowing from larger and stronger banks. Overall, the evidence indicates that government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited banks’ balance sheets to some extent.
    Date: 2021
  6. By: Alexander Hodbod; Cars Hommes; Stefanie J. Huber; Isabelle Salle
    Abstract: Prospective economic developments depend on the behavior of consumer spending. A key question is whether private expenditures recover once social distancing restrictions are lifted or whether the COVID-19 crisis had a sustained impact on consumer confidence, preferences, and hence, spending. The elongated and profound experience of the COVID-19 crisis may durably affect consumer preferences. We conducted a representative consumer survey in five European countries in summer 2020 after the release of the first wave’s lockdown restrictions. We document the underlying reasons for households’ reduction in consumption in five key sectors: tourism, hospitality, services, retail, and public transports. We identify a large confidence shock in the Southern European countries and a shift in consumer preferences in the Northern European countries, particularly among high-income earners. We conclude that the COVID-19 experience has altered consumer behavior and that long-term sectoral consumption shifts may occur.
    Keywords: Coronavirus disease (COVID-19); Domestic demand and components; Firm dynamics; Fiscal policy; Recent economic and financial developments
    JEL: D12 D81 D84 E21 E60 E71
    Date: 2021–11
  7. By: Campos, Nauro F. (University College London); Coricelli, Fabrizio (Paris School of Economics); Franceschi, Emanuele (Paris School of Economics)
    Abstract: This paper studies the productivity effects of integration deepening. The identification strategy exploits the 1995 European Union (EU) enlargement, when all candidate countries joined the Single Market but one — Norway — did not join the EU. Our synthetic difference-in-differences estimates on sectoral and regional data suggest had Norway chosen deeper integration, the average Norwegian region would have experienced an increase in yearly productivity growth of about 0.6 percentage points. This method also helps determining the sources of heterogeneity, apparently inherent to integration, highlighting higher costs of the missed deeper integration for more peripheral regions and industrial sector.
    Keywords: institutional integration, economic integration, productivity growth, European Union, European Economic Area
    JEL: C33 F15 F55 O43 O52
    Date: 2021–11
  8. By: Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Andrea Monticini (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); David Peel
    Abstract: We study the impact of ECB’s supervisory announcements on the Bank Stock index, from 2013 through 2017. Our evidence shows that the news, related to supervisory actions, do have highly significant effects on the market price of banks, contributing to the volatility of the Bank Stock Index for Europe and Italy. Most announcements signal the need to raise more regulatory capital and lead to negative returns in the stock market, thus increasing the cost of raising new capital. Our study is related to previous ones (by Bernanke and Kuttner) focusing on the impact of monetary policy announcements on the stock exchange.
    Keywords: Banking Supervision, ECB, GARCH, Stock Market.
    JEL: G21 G28
    Date: 2021–11
  9. By: Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Elie Bouri (School of Business, Lebanese American University, Lebanon)
    Abstract: Theory suggests the existence of a bi-directional relationship between stock market volatility and monetary policy rate uncertainty. In light of this, we forecast volatilities of equity markets and shadow short rates (SSR) - a common metric of both conventional and unconventional monetary policy decisions, by applying a bivariate Markov-switching multifractal (MSM) model. Using daily data of eight advanced economies (Australia, Canada, Euro area, Japan, New Zealand, Switzerland, the UK, and the US) over the period of January, 1995 to March, 2021, we find that the bivariate MSM model outperforms, in a statistically significant manner, not only the benchmark historical volatility and the univariate MSM models, but also the Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) framework, particularly at longer forecast horizons. This finding confirms the bi-directional relationship between stock market volatility and uncertainty surrounding conventional and unconventional monetary policies, which in turn has important implications for academics, investors and policymakers.
    Keywords: Shadow short rate uncertainty, Stock market volatility, Markov-switching multifractal model (MSM), Forecasting
    JEL: C22 C32 C53 D80 E52 G15
    Date: 2021–11
  10. By: Raupach, Peter; Memmel, Christoph
    Abstract: Using detailed data of all German banks, we find that banks which have suffered heavy credit losses reduce their corporate lending business by 1.32 euro for each euro lost; with 95% confidence, the effect is between 0.85 and 1.80 euros. This sensitivity is in line with (quite heterogeneous) results of earlier studies but significantly lower than those arising from the assumption of constant leverage. Weakly capitalized banks grant fewer new loans than other banks. We control for credit demand using a new method, the construction of tailored hypothetical bank competitors.
    Keywords: Credit losses,Bank lending
    JEL: G21
    Date: 2021
  11. By: Hatton, Timothy J. (University of Essex)
    Abstract: A minority of applicants for asylum in Europe gain some form of recognition as refugees, and this has been a controversial issue. From the early 2000s the EU introduced a series of directives to prevent a race to the bottom in asylum policies and to harmonise policy between destination countries but the results have not been fully assessed. In this paper I examine the determinants of recognition rates for asylum applicants from 65 origin countries to 20 European destinations from 2003 to 2017. The outcomes of the EU directives have been mixed, but taken together they are associated with increased recognition rates. These made a modest contribution to the trend increase in recognition rates most of which is due to increased political terror and human rights repression in origin countries. But differences between European countries remain large, even after accounting origin country composition and for differences in the adoption of EU directives. Some of this may be accounted for by differences in bureaucratic frameworks through which policy is administered.
    Keywords: refugees, asylum, recognition rates
    JEL: F51 J15 J61 K37
    Date: 2021–11
  12. By: Tischer, Johannes
    Abstract: The Eurosystem's Public Sector Purchase Programme (PSPP) increased the scarcity of safe assets, which caused significant declines and substantial dispersion in European repo rates. However, banks holding these safe assets benefited from this development: First, using the German security register, this paper shows that scarcity affects bank funding costs, as their collateral supply is determined by their ex ante securities holdings and repo rates. Second, it makes use of the German credit register to show that asset scarcity had real effects: Banks more exposed to asset scarcity increased their credit supply.
    Keywords: Quantitative easing,safe asset scarcity,repo rates,bank lending,monetary transmission
    JEL: E51 E58 G11 G21
    Date: 2021
  13. By: Lee A. Craig; Julianne Treme; Thomas J. Weiss
    Abstract: We constructed a time series of menu prices for the identifiable restaurants at which James Bond dined in France and the UK that yields one of the few international price series representing luxury services. This series enabled us to calculate a real exchange rate based on prices pertinent to international travelers. We also compiled a time series on the salary of workers in the British Civil Service at Grade 7, like Bond, from 1953 to 2019. Our results indicate that French restaurant prices increased faster than Grade 7 salaries over the entire period and changes in the British exchange rate were not favorable for British travelers. To dine weekly in France, during the 1950s and 1960s, Bond would have spent 18 percent of his salary; whereas over the course of the Euro era the same basket of luxury services would have required on average 26 percent of his salary. Finally, our data indicate a likely violation of the law of one price during both the Pound-Franc and Pound-Euro eras.
    JEL: D4 E3 F2 N10 N14 Z3
    Date: 2021–10
  14. By: Mr. Shekhar Aiyar; Mai Chi Dao
    Abstract: Kurzarbeit (KA), Germany’s short-time work program, is widely credited with saving jobs and supporting domestic demand during the COVID-19 recession. We quantify the impact by exploiting state-level variation in exposure to the pandemic shock and KA take-up. We construct a shift-share measure of the labor demand shock and instrument KA take-up using the pre-existing, state-specific share of workers eligible for KA. We find, first, that KA was crucial in mitigating unemployment: absent its expansion the unemployment rate would have increased by an additional 3 pp on average at the trough of the recession. Second, KA also bolstered domestic demand: the contraction in consumption could have been 2 to 3 times larger absent the program. Finally, we provide preliminary evidence on the sensitivity of the medium-run reallocation of resources to the prevalence of jobretention schemes during the Global Financial Crisis.
    Keywords: Kurzarbeit, Short-time work, Unemployment, Covid-19
    Date: 2021–10–01
  15. By: Elsby, Michael W.L. (University of Edinburgh); Smith, Jennifer C. (University of Warwick, CAGE, Migration Advisory Committee); Wadsworth, Jonathan (Centre for Economic Performance at the LSE, CReAM at UCL and IZA Bonn)
    Abstract: This paper examines the role of population flows on labour market dynamics across immigrant and native-born populations in the United Kingdom. Population flows are large, and cyclical, driven first by the maturation of baby boom cohorts in the 1980s, and latterly by immigration in the 2000s. New measures of labour market flows by migrant status uncover both the flow origins of disparities in the levels and cyclicalities of immigrant and native labour market outcomes, as well as their more recent convergence. A novel dynamic accounting framework reveals that population flows have played a non-trivial role in the volatility of labour markets among both the UK-born and, especially, immigrants.
    Keywords: Immigration ; worker flows ; labour market dynamics JEL Classification: E24 ; J6
    Date: 2021
  16. By: Costantiello, Alberto; Laureti, Lucio; Leogrande, Angelo
    Abstract: In this article we investigate the determinants of the Intellectual Assets in Europe. We use data from the European Innovation Scoreboard of the European Commission in the period 2000-2019 for 36 countries. Data are analyzed using Panel with Fixed Effects, Random Effects, WLS, Pooled OLS, Dynamic Panel at 1 Stage. Results show that the presence of Intellectual Assets in Europe is positively associated with “Enterprise Births”, “Top R&D Spending Enterprises per 10 mln Population”, “Employment Share Manufacturing”, “Share High and Medium high-tech Manufacturing”, “Attractive Research Systems”, “Finance and Support”, “Innovators”, “Sales Impact” and is negatively associated to “Government Procurement of Advanced Technology Products” and “Share Knowledge-Intensive Services”
    Keywords: Innovation, Innovation, and Invention: Processes and Incentives; Management of Technological Innovation and R&D; Diffusion Processes; Open Innovation.
    JEL: O30 O31 O32 O33 O34
    Date: 2021–11–04
  17. By: Luigi Guiso (Einaudi Institute for Economics and Finance and CEPR); Massimo Morelli (Bocconi University, IGIER, PERICLES and CEPR); Tommaso Sonno (University of Bologna and CEP (LSE)); Helios Herrera (Warwick University and CEPR)
    Abstract: This paper argues that the financial crisis was a watershed in the burst of populism both on the demand side (voters behaviour) and on the supply side (political parties behaviour). On the demand side, we provide novel results on the causal effect of the financial crisis on trust, turnout and voting choices via its effects on voters economic insecurity. Economic insecurity peaks during the financial crisis and extends to segments of the population untouched by the globalization and robotization shocks. To establish causality, we use a pseudo-panel analysis and instrument the economic insecurity of different cohorts leveraging on a new methodology designed to highlight the different sensitivity to financial constraints for people in different occupations. On the supply side, we trace from manifestos the policy positions of old and new parties showing that the supply of populism had the largest jump right after the financial crisis. The size of the jump is largest in countries with low fiscal space and for parties on the left of the political spectrum. We provide a formal rationalization for the key role of fiscal space, showing how the pre-financial crisis shocks enter the picture as sources of a shrinking fiscal space.
    Date: 2021

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