nep-eec New Economics Papers
on European Economics
Issue of 2022‒01‒10
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Household saving and fiscal policy: evidence for the euro area from a thick modelling perspective By Checherita-Westphal, Cristina; Stechert, Marcel
  2. The exchange rate insulation puzzle By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
  3. Trade impacts of the Trade and Cooperation Agreement between the European Union and the United Kingdom By Frank van Tongeren; Christine Arriola; Annabelle Mourougane; Sebastian Benz
  4. Sectoral exchange rate pass-through in the euro area By Osbat, Chiara; Sun, Yiqiao; Wagner, Martin
  5. An ECB’s Staff Narrative of Two Decades of European Central Banking: a critical review By Sergio Cesaratto
  6. Product market structure and monetary policy: evidence from the Euro Area By Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
  7. The core, the periphery, and the disaster: Corporate-sovereign nexus in COVID-19 times By Jappelli, Ruggero; Pelizzon, Loriana; Plazzi, Alberto
  8. The Prudence Principle: A New Framework for Eurozone Fiscal Policy By Eric Lonergan; Mark Blyth
  9. Who Should Bear the Burden of Covid-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective By Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
  10. Public Investment, Convergence and Productivity Growth in European regions By Roberto Martino
  11. Stock market as a nowcasting indicator for real investment By Degiannakis, Stavros
  12. Examining the impact of debt on investment for Austrian non-financial sectors and firms By Dennis Dlugosch; Selçuk Gul
  13. Enhancing regional convergence in the European Union By Álvaro Pina; Patrizio Sicari
  14. Population growth, immigration, and labour market dynamics By Elsby, Michael W. L.; Smith, Jennifer C.; Wadsworth, Jonathan
  15. Asymmetries in Global Value Chain Integration, Technology and Employment Structures in Europe: Country and Sectoral Evidence By Filippo Bontadini; Rinaldo Evangelista; Valentina Meliciani; Maria Savona

  1. By: Checherita-Westphal, Cristina; Stechert, Marcel
    Abstract: We study the relationship between fiscal policy and household saving across the euro area countries for the period 1999-2019. To this extent, we propose a thick modelling approach, which allows a vast number of model specifications in a dynamic panel setting. We find that fiscal expansions are associated with an increase in household saving rate in the euro area, which supports a partial, but not full, Ricardian equivalence channel. The relationship holds regardless of how we measure the (discretionary) fiscal policy impulse. The median saving offset across all baseline specifications is around 19% in the short run and 41% in the long run. Various robustness checks underpin the basic results, while also pointing to model and estimation uncertainty and no robust evidence for total private saving offset. Our results for the euro area are broadly in line with the literature, albeit they tend to yield a somewhat weaker evidence for the saving offset of fiscal policy, particularly in relation to earlier studies. JEL Classification: D14, E62, H6
    Keywords: deficit and debt, fiscal policy, household saving, national budget
    Date: 2021–12
  2. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
    Abstract: We confront the notion that flexible rates insulate a country from external disturbances with new evidence on spillovers from euro-area shocks to neighboring countries. We find that in response to euro-area shocks, spillovers are not smaller, and currency movements not significantly larger, in countries that float their currency, relative to those that peg to the euro—the insulation puzzle. Unconditionally, however, currency volatility is significantly higher for floaters. A state-of-the-art open-economy model can fit our conditional evidence on lack of insulation, provided monetary policy targets headline inflation, but only at the cost of missing the unconditional evidence on currency volatility. JEL Classification: F41, F42, E31
    Keywords: exchange-rate disconnect, exchange-rate regime, external shock, insulation, international spillovers
    Date: 2021–12
  3. By: Frank van Tongeren; Christine Arriola; Annabelle Mourougane; Sebastian Benz
    Abstract: This paper assesses the medium term impact of the United Kingdom leaving the EU Single Market under the terms of the EU-UK Trade and Cooperation Agreement (TCA) reached at the end of 2020 using the OECD METRO CGE model. The analysis does not include any transitional costs to fully implementing the new trade agreement, nor does it take into account stress on the economy as a result of COVID-19. Lastly, only the implications on services trade from regulatory restrictions on the free movement of people have been incorporated in the analysis while the wider labour market impacts of cross-border movement of people are left aside. Results from the simulation show that real GDP losses in the European Union, in the worst case scenario are expected to be around 0.6% in the medium term, but would vary markedly across countries. Ireland would experience the largest losses, while countries with loose trade links with the United Kingdom would barely be affected. The decline in trade is not uniform among sectors. European Union member states are expected to import less professional services such as financial services and insurance, communication, and other business services. UK exports are estimated to fall by about 6.3% and imports by 8.1% in the medium term. The overall medium-term loss in real GDP could amount to 4.4%.
    Keywords: Brexit, free-trade agreement, general-equilibrium model
    JEL: C68 F15 F47
    Date: 2021–12–22
  4. By: Osbat, Chiara; Sun, Yiqiao; Wagner, Martin
    Abstract: We study exchange rate pass-through (ERPT), i.e., the impact of exchange rate movements on inflation, focusing on euro area import prices at a sectorally disaggregated level. Our estimation strategy is based on VAR-X models, thus incorporating both endogenous and exogenous explanatory variables. The impulse response functions not only allow to study the extent but also the dynamics of ERPT. We find that ERPT is heterogeneous in terms of magnitude across sectors. We further investigate what industry-specific characteristics affect the heterogeneity of ERPT. Across various model specifications including import penetration, market integration, competition and value chain integration, we find that higher market concentration and higher backward integration in global value chains decrease pass-through, in line with previous findings in the literature. JEL Classification: C50, F30, F40
    Keywords: euro area, exchange rates, import prices, pass-through, sectoral disaggregation
    Date: 2021–12
  5. By: Sergio Cesaratto
    Abstract: Monetary Policy in Times of Crisis (Rostagno et al. 2021) has three relevant features. The first is its criticism of the absence of an adequate European fiscal policy during the financial crisis. This left the ECB on its own. The second feature concerns the explanation of the theoretical framework that guided the ECB's action. While it is interesting that the authors point out that monetary policy acts on the demand side (and is therefore neutral neither in the short nor in the long-run), a plain explanation of the channels through which the central bank can influence demand is absent. The third feature is the chronicle of events and of the clash of positions within the ECB. This aspect would have, however, gained from a bolder and less conventional interpretative scheme. The book thus appears to be lacking both in a clear exposition of the ECB's analytical background and its evolution during the crisis, and in a comprehensive explanation of its policies. It is likely that the authors' economic training based on the neo-Keynesian mainstream model has greatly conditioned them in a technically convoluted, but too often uninspiring interpretation of events and policies. It is also possible that the difficulty of demonstrating the effectiveness of the monetary policy measures undertaken by the ECB in the absence of a proactive fiscal policy contributed to the widespread technical laboriousness of the argument in many pages of the book. Especially for academic teaching, but also for the informed public debate, a more accessible level would have been advisable. An appendix seeks to explain T-LTRO operations, the logic of which the book fails to elucidate
    JEL: E11 E12 E52 E58 N14
    Date: 2021–12
  6. By: Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
    Abstract: Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1
    Keywords: competition, credit constraints, marginal costs, monetary transmission, OMT
    Date: 2021–12
  7. By: Jappelli, Ruggero; Pelizzon, Loriana; Plazzi, Alberto
    Abstract: We show that the COVID-19 pandemic triggered a surge in the elasticity of non-financial corporate to sovereign credit default swaps in core EU countries, characterized by strong fiscal capacity. For peripheral countries with lower budgetary slackness, the pandemic had essentially no impact on such elasticity. This evidence is consistent with the disaster-induced repricing of government support, which we model through a rare-disaster asset pricing framework with bailout guarantees and defaultable public debt. The model implies that risk-adjusted guarantees in the core were 2.6 times those in the periphery, suggesting that fiscal capacity buffers provide relief to firms' financing costs.
    Keywords: COVID-19,Credit Risk,Sovereign Risk,Fiscal Capacity,Bailout
    JEL: F65 G01 G15
    Date: 2021
  8. By: Eric Lonergan (M&G Investments); Mark Blyth (Brown University)
    Abstract: This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.
    Keywords: debt, fiscal policy, monetary policy, interest rates, functional finance
    JEL: E5 E58 E62
    Date: 2021–12
  9. By: Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
    Abstract: The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.
    Keywords: fiscal pressure, optimal taxation
    JEL: H21 H23
    Date: 2021
  10. By: Roberto Martino
    Abstract: This paper estimates an augmented growth model to analyse the contribution of public investment to productivity growth for European regions. The empirical model accounts for the accumulation of public capital, the stock of infrastructure and the creation of knowledge by the government sector, alongside other growth determinants, as institutions, education, and business R&D. Convergence dynamics are also explored. Data include 273 NUTS2 European regions from 27 countries from 1999 to 2018. The empirical evidence presented suggests that public investment is positively associated with productivity growth and complementarities with business investment are in place. Furthermore, returns on both types of investments are larger in the regions of the Southern periphery, flagging policy space for further public and private productive spending. No significant effect is found for the stock of infrastructure. Public R&D has an indirect impact on productivity growth through the mediating effect of business R&D, while institutional quality is a horizontal determinant of growth.
    Date: 2021
  11. By: Degiannakis, Stavros
    Abstract: The paper proposes a novel method to assess whether real investment can be nowcasted based on information that is available on the stock market. The stock market index on a daily sampling frequency is assessed as a predictor of gross fixed capital formation on a quarterly sampling frequency. For France, Germany, Greece and Spain (four representative countries of eurozone), we find significant empirical evidence that the information from the stock market does produce accurate nowcasting values of gross fixed capital formation.
    Keywords: Gross fixed capital formation, nowcasting, mixed frequency, predictor, real investment, stock market.
    JEL: C53 E22 E27 G17
    Date: 2021–12–31
  12. By: Dennis Dlugosch; Selçuk Gul
    Abstract: Using a micro-level model of investment, this paper finds that firm-debt and investment are negatively associated across firms in Austrian manufacturing industries. The finding is robust to various changes to the model specification. Moreover, in an extension of the basic model, different components of debt are examined, pointing out that debt owed to banks and long-term debt have a stronger negative effect than other forms of debt. Comparisons with investment models estimated for other European countries suggest that the impact of debt on investment is more negative in Austria than elsewhere. Results from interaction models of debt owed to banks with an index of credit easing show that firms in industries which are more bank-dependent invest relatively more than firms in industries that are less bank-dependent after an easing of credit conditions.
    Keywords: Austria, corporate debt, Corporate investment
    JEL: E22 E44
    Date: 2021–12–17
  13. By: Álvaro Pina; Patrizio Sicari
    Abstract: Progress in regional convergence in the EU has been uneven over the last two decades. While Central and Eastern Europe has been catching up, Southern Europe has often lost ground, especially after the global financial crisis. Furthermore, within most countries, gaps between large cities and rural areas have widened. Some challenges to convergence have stemmed from worldwide factors – such as globalisation, digitalisation, global warming, and, more recently, COVID19 – but others are European-specific, like incomplete financial integration, less effective fiscal governance and subpar innovation performance.This paper proposes policy action to reduce regional divergence by helping regions upgrade their productive specialisation. Building on new approaches to regional and industrial policies, Europe needs to exploit the full potential of cross-country cooperation in innovation and of urban agglomeration economies. Competition and trade policies need to ensure a level playing field to enhance the benefits of open and competitive markets while responding to new challenges, such as digitalisation or foreign subsidies. Finally, Cohesion Policy and the Common Agricultural Policy, the two largest EU budget instruments, need to become more effective at promoting productive upgrading.
    Keywords: Common Agricultural Policy, competition policy, EU cohesion policy, innovation policy, regional specialisation, territorial inequalities
    JEL: L40 O38 R11 R58
    Date: 2021–12–17
  14. By: Elsby, Michael W. L. (University of Edinburgh); Smith, Jennifer C. (University of Warwick, CAGE, Migration Advisory Committee); Wadsworth, Jonathan (Royal Holloway University of London, 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 nontrivial 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
  15. By: Filippo Bontadini; Rinaldo Evangelista; Valentina Meliciani; Maria Savona
    Abstract: This paper provides empirical evidence on the complex role played by technology in affecting the relationship between the participation of EU countries and industries in Global Value Chains (GVCs) and their employment structure over the period 2000-2014. The empirical analysis is based on country/industry level data for 21 EU countries on employment, trade in value added, patents and investments in intangible assets, and focusses on backward linkages within GVCs. The role of technology is analysed by taking into account both the technological intensity of offshoring industries and that of their GVC partners. We study the employment structure by looking at the shares of managers and manual workers, which reflect the “functional specialisation” of the country-sector within GVCs. We find that pre-existing asymmetries in the functional specialisation are highly persistent over time, with little sign of convergence over our observed period. Furthermore, GVC participation is not related to changes in the employment structure. However, this relationship appears to be mediated by country-industries’ initial technological performance. Technological leader industries exhibit, in fact, larger shares of employment in headquarter functions, and this functional specialisation tends to be strengthened as they increase their integration into GVCs. In contrast, country-industries that start off as technological laggards see integration into GVCs accompanied by an increase in the share of employment in fabrication functions. The technological profile of the partners is also found to play a role in the relationship between GVC integration and the functional specialisation of the offshoring country/industry, although different patterns emerge depending on the nature of the partner (manufacturing vs service).
    Keywords: global value chains, employment, technology, intangible assets, patents
    JEL: F14 F15 O33
    Date: 2021

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