nep-eec New Economics Papers
on European Economics
Issue of 2021‒12‒13
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Determinants of European Banks’ Default Risk By Nicolas Soenen; Rudi Vander Vennet
  2. ECB Consumer Expectations Survey: an overview and first evaluation By Bańnkowska, Katarzyna; Borlescu, Ana Maria; Charalambakis, Evangelos; Da Silva, António Dias; Di Laurea, Davide; Dossche, Maarten; Georgarakos, Dimitris; Honkkila, Juha; Kennedy, Neale; Kenny, Geoff; Kolndrekaj, Aleksandra; Meyer, Justus; Rusinova, Desislava; Teppa, Federica; Törmälehto, Veli-Matti
  3. Bond Convenience Yields in the Eurozone Currency Union By Jiang, Zhengyang; Lustig, Hanno; Van Nieuwerburgh, Stijn; Xiaolan, Mindy Z.
  4. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  5. Environmental Productivity and Convergence of European Manufacturing Industries. Are they Under Pressure? By Stergiou, Eirini; Rigas, Nikos; Kounetas, Konstantinos
  6. Inflation tolerance ranges in the new keynesian model By Hervé Le Bihan; Magali Marx; Julien Matheron
  7. Optimal capital structure, model uncertainty, and European SMEs By Iván Arribas; Emili Tortosa-Ausina; TingTing Zhu
  8. Taxing income or consumption: macroeconomic and distributional effects for Italy By D'ANDRIA Diego; DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan; ZACHLOD-JELEC Magdalena
  9. A greenium for the next generation EU green bonds: Analysis of a potential green bond premium and its drivers By Hinsche, Isabelle Cathérine
  10. Avoiding a Trap and Embracing the Megatrends: Proposals for a New Growth Model in EU-CEE By Alexandra Bykova; Richard Grieveson; Doris Hanzl-Weiss; Gabor Hunya; Niko Korpar; Leon Podkaminer; Robert Stehrer; Roman Stöllinger
  11. The Role of Market Structure and Timing in Determining VAT Pass-Through By Mr. Matthieu Bellon
  12. Redistributive Effect and the Progressivity of Taxes and Benefits: Evidence for the UK, 1977–2018 By Jenkins, Stephen P.; Herault, Nicolas

  1. By: Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: Using bank CDS spreads, we examine three types of determinants of Euro Area bank default risk in the period 2008-2019: bank characteristics related to new regulation, the bank-sovereign nexus and the monetary policy stance. We find that Basel 3 regulation improves the banks’ risk profile since higher capital ratios and more stable deposit funding contribute significantly to lower CDS spreads. We confirm the persistence of the bank-sovereign interconnectedness and find that sovereign default risk is transmitted to bank risk with an amplification factor. The ECB monetary policy stance is neutral with respect to bank risk, hence we find no evidence of perceived excessive risk-taking behavior.
    Keywords: bank default risk, CDS spreads, monetary policy, sovereign risk
    JEL: G21 G32 E52
    Date: 2021–11
  2. By: Bańnkowska, Katarzyna; Borlescu, Ana Maria; Charalambakis, Evangelos; Da Silva, António Dias; Di Laurea, Davide; Dossche, Maarten; Georgarakos, Dimitris; Honkkila, Juha; Kennedy, Neale; Kenny, Geoff; Kolndrekaj, Aleksandra; Meyer, Justus; Rusinova, Desislava; Teppa, Federica; Törmälehto, Veli-Matti
    Abstract: The Consumer Expectations Survey (CES) is an important new tool for analysing euro area household economic behaviour and expectations. This new survey covers a range of important topical areas including consumption and income, inflation and gross domestic product (GDP) growth, the labour market, housing market activity and house prices, and consumer finance and credit access. The CES, which was launched as a pilot in January 2020, is a mixed frequency modular survey, which is conducted online. The survey structure and centralised data collection ensures the collection of harmonised quantitative and qualitative euro area information in a timely manner that facilitates direct cross-country comparisons. During the pilot phase, it was conducted for the six largest euro area countries and contained 10,000 individual respondents. In the context of the coronavirus (COVID-19) pandemic, the CES has been used to gather useful information on the impact of the crisis on the household sector and the effectiveness of policy measures to mitigate the effects of the pandemic. The CES also collects information on the public’s overall trust in the ECB, their knowledge about its objectives and the channels through which they learn about its monetary policy and other central bank-related topics. This paper describes the key features of this new ECB survey – including its statistical properties – and offers a first evaluation of the results from the pilot phase. It also identifies a number of areas where the survey can be usefully developed further. Overall, the experience with the CES has been very positive, and the pilot survey is considered to have achieved its main objectives. JEL Classification: C42, D12, D14, E21, E24, E31
    Keywords: consumer behaviour, euro area, expectations, household surveys, micro data set
    Date: 2021–12
  3. By: Jiang, Zhengyang (Northwestern Kellogg); Lustig, Hanno (Stanford GSB, NBER, SIEPR); Van Nieuwerburgh, Stijn (Columbia Business School, NBER, CEPR); Xiaolan, Mindy Z. (UT Austin McCombs)
    Abstract: This paper analyzes bond convenience yields in a currency union. The intertemporal government budget constraint requires member countries’ bond convenience yields and default spreads to adjust in response to shocks to their government surpluses. In the data, adjustments to convenience yields explain a larger fraction of the variation in Eurozone bond yields than default spreads. Higher convenience yields are correlated with stronger fiscal conditions both in the cross-section and in the time series. These findings imply large fiscal costs especially on the peripheral countries. If all Eurozone countries could have issued sovereign bonds at the same convenience yields as Germany, they would have raised an extra 281 billion euros in cumulative revenues from bond issuance between 2003 and 2020, representing 2.6% of 2020 Eurozone GDP.
    Date: 2021–07
  4. 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
  5. By: Stergiou, Eirini; Rigas, Nikos; Kounetas, Konstantinos
    Abstract: European industries are under pressure regarding their environmental performance and productivity growth. The current energy crisis offsets governments efforts to achieve carbon neutrality while removing significant degrees of freedom in terms of firm's competitiveness. This paper studies environmental productivity and its components at a European industrial level using a dataset of 13 industries of the manufacturing sector from 27 European countries over the 1995-2014 period. Our results point out that industrial environmental productivity has deteriorated across Europe with best practice change being the main contributor. In addition, referring to the technological leaders in Europe, the findings point out that low tend to follow the middle-high technology industries. Finally, the non-convergence hypothesis and the creation of discrete clubs for the productivity index case and its components are supported.
    Keywords: European Industries; Metafrontier Malmquist Luenberger index; Convergence; Technological heterogeneity
    JEL: C61 D24 L60 Q43 Q56
    Date: 2021–11–20
  6. By: Hervé Le Bihan (Banco de España and Banque de France); Magali Marx (Banque de France); Julien Matheron (Banque de France)
    Abstract: A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range, than when it is close to the target, i.e., the central value of the band. We show that (i) a tolerance band should not be a zone of inaction: the lack of reaction within the band endangers macroeconomic stability and leads to the possibility of multiple equilibria; (ii) the trade-off between the reaction needed outside the range versus inside appears unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate for a moderately lower reaction within tolerance band; (iii) these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.
    Keywords: monetary policy, inflation ranges, inflation bands, zero lower bound (ZLB), endogenous regime switching
    JEL: E31 E52 E58
    Date: 2021–11
  7. By: Iván Arribas (IVIE, ERI-CES and Department of Economic Analysis, Universitat de València, Spain); Emili Tortosa-Ausina (IVIE, Valencia and IIDL and Department of Economics, Universitat Jaume I, Castellón, Spain); TingTing Zhu (Leicester Castle Business School, DeMontfort University, UK)
    Abstract: We revisit the determinants of capital structure for European SMEs. Our work differs from previous contributions in the field by considering several measures of leverage (short-term debt, long-term debt, and total debt) and employing panel Bayesian model averaging, in an effort to address regression model uncertainty. Examining a rich set of firm-specific, country-specific, and institutional determinants of capital structure in 15 European Union countries over the period 2002–2019, we find that the effects of the different variables considered on leverage are intricate. First, only certain variables are important in explaining capital structure, based on their high posterior inclusion probabilities (above 0.5). Second, the effect of some variables differs depending on the measure of leverage considered. Under Bayesian model averaging, results are based on all possible models, rather than a particular one, and give a much greater depth of information. Therefore, our methods help to provide some additional guidance on the existing competing theories (trade-off, pecking-order, agency), which seems appropriate as empirical studies to date have not been conclusive. Our findings are especially pertinent in the European context where the predominance of SMEs, which are vulnerable to economic downturns, makes it particularly relevant to understand what determines their capital structure.
    Keywords: Bayesian model averaging, capital structure, European Union, SMEs
    JEL: G32 G33 D21 D22
    Date: 2021
  8. By: D'ANDRIA Diego (European Commission - JRC); DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan (European Commission - JRC); ZACHLOD-JELEC Magdalena (European Commission - JRC)
    Abstract: We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects, notwithstanding the revenue-compensating increase in consumptions taxes.
    Keywords: computable general equilibrium, overlapping generations, taxation, microsimulation, Italy, tax shift
    Date: 2021–12
  9. By: Hinsche, Isabelle Cathérine
    Abstract: As part of the Next Generation EU (NGEU) program, the European Commission has pledged to issue up to EUR 250 billion of the NGEU bonds as green bonds, in order to confirm their commitment to sustainable finance and to support the transition towards a greener Europe. Thereby, the EU is not only entering the green bond market, but also set to become one of the biggest green bond issuers. Consequently, financial market participants are eager to know what to expect from the EU as a new green bond issuer and whether a negative green bond premium, a so-called Greenium, can be expected for the NGEU green bonds. This research paper formulates an expectation in regards to a potential Greenium for the NGEU green bonds, by conducting an interview with 15 sustainable finance experts and analyzing the public green bond market from September 2014 until June 2021, with respect to a potential green bond premium and its underlying drivers. The regression results confirm the existence of a significant Greenium (-0.7 bps) in the public green bond market and that the Greenium increases for supranational issuers with AAA rating, such as the EU. Moreover, the green bond premium is influenced by issuer sector and credit rating, but issue size and modified duration have no significant effect. Overall, the evaluated expert interviews and regression analysis lead to an expected Greenium for the NGEU green bonds of up to -4 bps, with the potential to further increase in the secondary market.
    Keywords: Sustainable Finance,Green Bonds,Greenium,Next Generation EU,EU Bonds,Environmental,Social and Governance (ESG),Sustainable Investing,Green Finance
    JEL: C23 G12 G14 G21 G23 G28 Q56
    Date: 2021
  10. By: Alexandra Bykova (The Vienna Institute for International Economic Studies, wiiw); Richard Grieveson (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Niko Korpar (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: It is now over three decades since the eleven EU member states in Central, Eastern, and Southeastern Europe (EU-CEE) started their transition to market capitalism. All countries experienced deep recessions in the early 1990s, but since have achieved mostly sustained convergence with Western Europe. Many EU CEE countries have overtaken Southern EU member states in terms of economic development. However, growth rates have slowed since the 2008 crisis, and the level of economic and social development varies widely across the region. This study has three key components. First, it establishes that the existing EU-CEE growth model may be reaching its limit, especially for the region’s most developed countries. Second, it details the megatrends which will further impact the region’s growth model now and in the future, including demographic, environmental, and digital factors. Finally, it outlines a set of policy options to develop the region’s growth model in a way that would drive a more sustained and sustainable rate of convergence with Western Europe in the coming decades. We find that governments in the region need to a) provide an underlying infrastructure that can support the growth of internationally competitive companies, b) fully embrace and take advantage of the digital revolution, c) maximise all available resources to profit from the green transition, and d) use policy levers to stimulate the automation of low productivity jobs and ease the transition into new and higher value work for their populations. Behind this should stand two important supportive pillars accommodative fiscal and monetary policy at the national and EU levels and a more progressive tax system to fund an expanded welfare state.
    Keywords: EU-CEE, transition, convergence, functional specialisation, digitalisation, green transition, EU, demographics, FDI, industrial policy
    JEL: O40 O47 P27 F21 O44 L16
    Date: 2021–11
  11. By: Mr. Matthieu Bellon
    Abstract: We examine the role of market characteristics and timing in explaining observed heterogeneity in VAT pass-through. We first extend existing theory to characterize the roles of imperfect competition and product differentiation, then investigate these relationships empirically using a panel of 14 Eurozone countries between 1999 and 2013. We find important roles for product market regulation and product quality, and little impact of advance announcement of reforms. Our findings have important implications for policy-makers considering VAT rate adjustments, by illuminating which of the consumers or the producers would experience the brunt of a reform across different settings.
    Keywords: Value added tax; Price effect; Pass through; Competition; Product Differentiation; pass-through heterogeneity; VAT pass-through; pass-through effect; baseline pass-through; elasticity coefficient; imperfect competition; pass-through adjustment; Value-added tax; Consumption; Commodity markets; Consumer prices; Europe
    Date: 2021–03–05
  12. By: Jenkins, Stephen P. (London School of Economics); Herault, Nicolas (Melbourne Institute of Applied Economic and Social Research)
    Abstract: We apply the Kakwani approach to decomposing redistributive effect into average rate, progressivity, and reranking components using yearly UK data covering 1977-2018. We examine cash and in-kind benefits, and direct and indirect taxes. In addition, we highlight an empirical implementation issue – the definition of the reference ('pre-fisc') distribution. Drawing on an innovative counterfactual approach, our empirical analysis shows that trends in the redistributive effect of cash benefits are largely associated with cyclical changes in average benefit rates. In contrast, trends in the redistributive effects of direct and indirect taxes are mostly associated with changes in progressivity. For in-kind benefits, changes in the average benefit rate and progressivity each played the major roles at different times.
    Keywords: Kakwani decomposition, inequality, redistributive effect, progressivity, reranking, benefits, taxes
    JEL: D31 H24 H50 I38
    Date: 2021–10

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