nep-eec New Economics Papers
on European Economics
Issue of 2021‒12‒20
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Assessing the fiscal-monetary policy mix in the euro area By Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
  2. The role of systemic risk spillovers in the transmission of Euro Area monetary policy By Skouralis, Alexandros
  3. Fiscal and current account imbalances: the cases of Germany and Portugal By António Afonso; José Carlos Coelho
  4. Macroeconomic reversal rate in a low interest rate environment By van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
  5. The Impact of r-g on the Euro-Area Government Spending Multiplier By Mr. Giovanni Melina; Mario di Serio; Matteo Fragetta
  6. The Impact of Political Uncertainty on Asset Prices: The Case of the United Kingdom's EU Membership Referendum By Mr. Niels-Jakob H Hansen; Ms. Margaux MacDonald
  7. Fan charts 2.0: flexible forecast distributions with expert judgement By Sokol, Andrej
  8. The Assessment of COVID-19 Effect on European Union Industrial Sector By Tudorache, Maria-Daniela; Nae, Maria Tamara; Jianu, Ionut
  9. The fiscal response to the Italian COVID-19 crisis: A counterfactual analysis By Giovanni Di Bartolomeo; Paolo D'Imperio; Francesco Felici
  10. Is a €10 trillion European climate investment initiative fiscally sustainable? By Rafael Wildauer; Stuart Leitch; Jakob Kapeller

  1. By: Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
    Abstract: This paper attempts to gauge the effects of various fiscal and monetary policy rules on macroeconomic outcomes in the euro area. It consists of two major parts – a historical assessment and an assessment based on an extended scenario until 2030 – and it builds on the ECB-BASE –a semistructural model for the euro area. The historical analysis (until end-2019, `pre-pandemic´) demonstrates that a consistently countercyclical fiscal policy could have created a fiscal buffer in good economic times and it would have been able to eliminate a large portion of the second downturn in the euro area. In turn, the post-pandemic simulations until 2030 reveal that certain combinations of policy rules can be particularly powerful in reaching favourable macroeconomic outcomes (i.e. recovering pandemic output losses and bringing inflation close to the ECB target). These consist of expansionary-for-longer fiscal policy, which maintains support for longer than usually prescribed, and lower-for-longer monetary policy, which keeps the rates lower for longer than stipulated by a standard reaction function of a central bank. Moreover, we demonstrate that in the current macroeconomic situation, fiscal and monetary policies reinforce each other and mutually create space for each other. This provides a strong case for coordination of the two policies in this situation. JEL Classification: E32, E62, E63
    Keywords: fiscal rules, joint analysis of fiscal and monetary policy, model simulations, monetary policy rules
    Date: 2021–12
  2. By: Skouralis, Alexandros
    Abstract: This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response. JEL Classification: C32, E44, F36, F45
    Keywords: Eurozone, global VAR model, systemic risk
    Date: 2021–12
  3. By: António Afonso; José Carlos Coelho
    Abstract: We investigate the bilateral relationship between government budget balances and current account balances for Portugal and Germany. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Portugal and Germany, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt as a percentage of GDP positively affects the current account balance in Portugal, and in Germany it does not. During the period of implementation of the external assistance programme in Portugal, the current account balance improved, while the government balance did not.
    Keywords: budget deficit; external deficit; Portugal; Germany; fiscal rules; time-series
    JEL: F32 F41 H62 C31 C32
    Date: 2021–12
  4. By: van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
    Abstract: This paper investigates how the monetary policy transmission channels change once the economy is in a low interest rate environment. We estimate a nonlinear model for the euro area and its five largest countries over the period 1999q2-2019q1 and allow for the effects of monetary policy shocks to be state dependent. Using smooth transition local projections, we examine the impulse responses of investment, savings, consumption, and the output gap to an expansionary monetary policy shock under normal and low interest rate regimes. We find evidence for a macroeconomic reversal rate related to the substitution effects becoming weaker relative to the income effects in a low interest rate regime. In this regime the effects of monetary policy shocks are either less powerful or reverse sign compared with a normal rate regime. JEL Classification: E21, E22, E43, E52
    Keywords: low interest rate environment, monetary policy, reversal rate
    Date: 2021–12
  5. By: Mr. Giovanni Melina; Mario di Serio; Matteo Fragetta
    Abstract: We compute government spending multipliers for the Euro Area (EA) contingent on the interestgrowth differential, the so-called r-g. Whether the fiscal shock occurs when r-g is positive or negative matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers in the negative and positive r-g regimes differs systematically from zero with very high probability. Over the medium run (5 years), median cumulated multipliers range between 1.22 and 1.77 when r-g is negative, and between 0.51 and 1.26 when r-g is positive. We show that the results are not driven by the state of the business cycle, the monetary policy stance, or the level of government debt, and that the multiplier is inversely correlated with r-g. The calculations are based on the estimates of a factor-augmented interacted panel vector-autoregressive model. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
    Keywords: Fiscal multiplier;Panel VAR;Factor models;Euro Area;r-g.;WP;government spending multiplier;potential GDP;cumulated multiplier;EA country;government debt
    Date: 2021–02–12
  6. By: Mr. Niels-Jakob H Hansen; Ms. Margaux MacDonald
    Abstract: How did expectations of the outcome of the United Kingdom's (UK) referendum on European Union (EU) membership in 2016 affect prices in financial markets? We study this using high frequency data from betting and financial markets. We find that a one percentage point increase in the probability of "Leave" result caused British stocks (FTSE All-Share) to decline by 0.004 percent, and the Pound to depreciate by 0.006 percent against the euro. We find negative and significant effects for most sub-sectors, and negative spill-overs to other EU member countries. We show that the differential impact across sectors and countries can be explained by differences in the trade exposures.
    Keywords: Brexit; EU referendum; political uncertainty; high frequency data.
    Date: 2021–02–05
  7. By: Sokol, Andrej
    Abstract: I propose a new model, conditional quantile regression (CQR), that generates density forecasts consistent with a specific view of the future evolution of some variables. This addresses a shortcoming of existing quantile regression-based models, for example the at-risk framework popularised by Adrian et al. (2019), when used in settings, such as most forecasting processes within central banks and similar institutions, that require forecasts to be conditional on a set of technical assumptions. Through an application to house price inflation in the euro area, I show that CQR provides a viable alternative to existing approaches to conditional density forecasting, notably Bayesian VARs, with considerable advantages in terms of flexibility and additional insights that do not come at the cost of forecasting performance. JEL Classification: C22, C53, E37, R31
    Keywords: at-risk, conditional forecasting, density forecast evaluation, house prices, quantile regression
    Date: 2021–12
  8. By: Tudorache, Maria-Daniela; Nae, Maria Tamara; Jianu, Ionut
    Abstract: In this paper, we estimated the impact of COVID-19 shock on the industrial production and on the confidence in industry at European Union level, using Panel EGLS method - weighted by Cross-section SUR option. The negative impact we found on both indicators is quite high and may severely affect the economy, in the absence of political support and in the case of prolonging COVID-19 crisis or starting another lockdown waves. The largest drops of industrial production were found in Italy, Slovakia, Romania and Hungary, while Latvia, Malta, Finland and the Netherlands were less vulnerable to the COVID- 19 shock. Through this paper, we also identified a high similarity between the dynamics of industrial production and the industrial confidence index. The outlooks are still exposed to uncertainty, but these have been improved in the latest months.
    Keywords: industrial production,crisis,coronavirus,COVID-19,confidence
    JEL: C23 I15 L16
    Date: 2021
  9. By: Giovanni Di Bartolomeo; Paolo D'Imperio; Francesco Felici
    Abstract: The COVID-19 pandemic is an unprecedented worldwide event with a massive impact on the economic system. The first Western country that had to face the COVID-19 crisis was Italy, which therefore represents a natural “case study.†By using the microdata and granular policy information available at the Italian Ministry of Economy and Finance, this paper provides a macroeconomic quantitative assessment of the initial emergency fiscal measures introduced in 2020 and an analysis of the impact of the COVID-19 shock during the lockdown
    Keywords: COVID-19; Coronavirus; Macroeconomic impact; Fiscal policies; Lockdowns; Fiscal-policy-study case
    JEL: E32 E62 E65
    Date: 2021–12
  10. By: Rafael Wildauer; Stuart Leitch; Jakob Kapeller
    Abstract: This policy study asks to what extent large-scale public investment efforts could be a viable tool to provide the necessary infrastructure to break Europe’s dependency on fossil fuel and carbon emissions more broadly. We estimate semi-structural VAR models for the EU27. These are used to study the impact of permanent as well as 5-year long public investment programmes. Three key findings emerge: First, government investment multipliers for the EU27 are large and range from 5.12 to 5.25. Second, debt-to-GDP ratios are likely to fall in response to the strong economic impulse generated by additional public investment spending. The study therefore classifies additional public investment spending in the EU27 as sustainable fiscal policy. Third, single country investment initiatives will likely lead to smaller economic expansions when compared to coordinated EU-wide investment, due to Europe’s strong intra-member state trade flows. A coordinated approach to fiscal policy is thus substantially more effective not only when it comes to delivering network-dependent infrastructure (rail, grid) but also with respect to the economic stimulus it creates.
    Keywords: Green fiscal policy, public debt sustainability
    JEL: E62 H63
    Date: 2021–12

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