nep-eec New Economics Papers
on European Economics
Issue of 2022‒01‒17
seven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Towards a single fiscal performance indicator By Benalal, Nicholai; Freier, Maximilian; Melyn, Wim; Van Parys, Stefan; Reiss, Lukas
  2. The Effect of the Euro Changeover on Prices: Evidence from Lithuania By Valentin Jouvanceau
  3. CREWS: a CAMELS-based early warning system of systemic risk in the banking sector By Jorge E. Galán
  4. Past Exposure to Macroeconomic Shocks and Populist Attitudes in Europe By Despina Gavresi; Anastasia Litina
  5. Financial Market Turbulence and Macro-Financial Developments in Ireland: a Mixed Data Sampling (MIDAS) Approach By Parla, Fabio
  6. EU-China Trade and intra-EU Trade: Substitute or Complementary? By Huiyao Chen; Changyuan Luo; Mary-Françoise Renard; Shiyi Sun
  7. Bank of Finland's long-run forecast framework with human capital By Kokkinen, Arto; Obstbaum, Meri; Mäki-Fränti, Petri

  1. By: Benalal, Nicholai; Freier, Maximilian; Melyn, Wim; Van Parys, Stefan; Reiss, Lukas
    Abstract: A key element of the European reform agenda is to simplify the EU fiscal governance framework by moving towards a single debt anchor and a single operational indicator as the basis for formulating fiscal targets and assessing compliance. This paper puts forward an in-depth analysis of two alternative fiscal performance indicators currently used in the EU fiscal framework: the change in the structural balance and the expenditure benchmark. Comparing these two indicators allows us to identify options for the design of a fiscal performance measure – such as assumptions on cyclical adjustment and the inclusion of fiscal variables – and assess their policy impact. Our paper finds that the expenditure benchmark used in the EU fiscal governance framework has advantages over the change in the structural balance. However, it still has scope for improvement. The paper also shows that taking account of interest payments in the expenditure benchmark would make fiscal policy more supportive of the monetary policy stance. JEL Classification: C54, E62, E65, F54, F47
    Keywords: EMU, euro area, fiscal governance, Stability and Growth Pact.
    Date: 2022–01
  2. By: Valentin Jouvanceau (Bank of Lithuania)
    Abstract: At the aggregate level, I find that the euro changeover did not lead to a significant change in the overall inflation rate between 2015 and 2019 in Lithuania. When the measures are diversified, however, some inflationary effects emerge in sub-categories. I therefore analyze this heterogeneity at the disaggregated level using a large sample of prices that constitutes the CPI from 2010 to 2018. I show that significant price changes have been confined to the low-weighted components of the HICP. This explains why a spike in the overall price level did not occur at the time of the changeover.
    Keywords: Euro changeover, synthetic difference-in-differences, regression discontinuity in time, price changes.
    JEL: E31 F33 L11
    Date: 2021–10–12
  3. By: Jorge E. Galán (Banco de España)
    Abstract: This document proposes an aggregate early-warning indicator of systemic risk in the banking sector. The indicator is derived from a logistic model based on the variables in the CAMELS rating system, originally developed for the US, and complemented with macroeconomic aggregate variables. The model is applied to the Spanish banking sector using bank-level data for a complete financial cycle, from 1999 to 2021. The performance of the model is assessed not only during the last global financial crisis and the subsequent sovereign crisis, but also during the recent Covid-19 shock. The proposed indicator has a macroprudential orientation, which differs from most of previous studies predicting individual bank defaults. The indicator is found to provide accurate early-warning signals of systemic risk in the banking sector within a two-year horizon. In this context, the indicator provides mid-term signals of systemic risk that complement those derived from macrofinancial indicators and from measures of the materialization of risk.
    Keywords: banks, defaults, early-warning performance, macroprudential policy, systemic risk
    JEL: C25 E32 E58 G01 G21
    Date: 2021–11
  4. By: Despina Gavresi; Anastasia Litina
    Abstract: This paper explores the interplay between past exposure to macroeconomic shocks and populist attitudes. We document that individuals who experienced a macroeconomic shock during their impressionable years (between 18 and 25 years of age), are currently more prone to voting for populist parties, and manifest lower trust both in national and European institutions. We use data from the European Social Survey (ESS) to construct the differential individual exposure to macroeconomic shocks during impressionable years. Our findings suggest that it is not only current exposure to shocks that matters (see e.g., Guiso et al. (2020)) but also past exposure to economic recessions, which has a persistent positive effect on the rise of populism. Interestingly, the interplay between the two, i.e., past and current exposure to economic shocks, has a mitigating effect on the rise of populism. Individuals who were exposed to economic shocks in the past are less likely to manifest populist attitudes when faced with a current crisis, as suggested by the experience-based learning literature.
    Keywords: macroeconomic shocks, trust, attitudes, populism
    JEL: D72 E60 F68 P16 Z13
    Date: 2021
  5. By: Parla, Fabio (Central Bank of Ireland)
    Abstract: In this paper, we construct a weekly measure of systemic stress across a range of indicators for Irish financial markets, covering money, sovereign bonds, equity, banking and foreign exchange markets by using a time-varying correlation-based approach. We compare the ability of the resulting index to capture known financial market stress events in Ireland with existing alternative measures. Furthermore, we use the indicator as a proxy of financial distress to assess the high-frequency propagation mechanism of financial markets shocks to the macroeconomy. Given that macroeconomic variables are sampled at a monthly frequency, the temporal transmission of shocks is carried through a structural Bayesian mixed-frequency Vector Autoregressive model. We find evidence of a moderate temporal aggregation bias due to aggregating weekly observations of the financial stress indicator to a monthly frequency. In particular, the results suggest that the response of the macroeconomic variables depends on the timing of the shocks within the month.
    Keywords: Financial stress index, macro-financial linkages, Mixed-Frequency VAR, MIDAS
    JEL: C32 E44 G10
    Date: 2021–09
  6. By: Huiyao Chen (The Wharton School - University of Pennsylvania [Philadelphia]); Changyuan Luo; Mary-Françoise Renard (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Shiyi Sun
    Abstract: This paper examines how EU-China trade affected intra-EU trade. The estimation shows that when a country's share of trade with China increased, its share of trade with EU partners declined. This suggests that stronger trade links with China resulted in weaker trade links among EU countries. Furthermore, the "disintegration" effect of the export to China was stronger than that of import from China, meaning that the influence of China as an export destination was greater than that of China as a source of import. An extended analysis shows that the disintegration effect was most strongly felt in trade links among EU core countries, less strongly felt in trade links between EU core and periphery countries, and least strongly felt in trade links among EU periphery countries. In comparison, we find that EU import from the US and India significantly weakened and strengthened intra-EU trade respectively. Estimation results using product level data demonstrate that the effects depend on the types of products we are concerned with. Whether using gross value or value added, the conclusions remain valid.
    Keywords: complementary,substitute,intra-EU trade,EU-China trade
    Date: 2021
  7. By: Kokkinen, Arto; Obstbaum, Meri; Mäki-Fränti, Petri
    Abstract: Population ageing constitutes a central challenge to Finland. Understanding the Finnish economy's likely future trajectory and the key sources of growth is important for the design of policies to counteract these adverse long-term trends. For this purpose, we develop a novel long-run forecast framework based on enodogenous growth theory with human and fixed capital. A central result is a pronounced projected decrease in human capital, substantially weighing on the long-run GDP outlook for Finland. To revert these trends substantial policy efforts are needed. Unless the decline in human capital can be prevented by increasing fertility, skilled immigration, education or employment, even reaching a growth rate of one per cent after the 2040s would require significant measures to increase new fixed capital investments with new technology.
    Keywords: Forecasting,GDP,Labour productivity,Human capital,Modern growth theory
    JEL: E17 E24 O11
    Date: 2021

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