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on European Economics |
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Issue of 2022‒01‒24
twelve papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Massimo Amato; Francesco Saraceno |
| Abstract: | The paper contributes to the debate on European macroeconomic governance. What is at stake is creating fiscal space for eurozone countries, while ensuring the sustainability of large public debts. Whether fiscal space is created through fiscal rules' reform, the creation of a central fiscal capacity, or a mix of the two, the question of public debt management, past and future, is paramount. Here we discuss a proposal that aims at systematic debt management through an ad hoc European Debt Agency. This EDA would progressively absorb Member States' debt, while keeping them accountable through pricing based on fundamental risk. We further show that (1) a Debt Agency could be designed so as not to imply debt mutualization or moral hazard and that (2) common debt management would allow the ECB to normalize monetary policy without creating instability in sovereign debt markets. An important argument of the paper is that any proposal that does not deal with the entirety of debt risks decreasing sustainability thus being counterproductive. |
| Keywords: | European Debt Agency; Fiscal Space; EMU Fiscal Governance; Growth and Stability Pact; Fiscal Rules; Risk Sharing; Public Debt; Debt Management |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp22172&r= |
| By: | Sang-Wook (Stanley) Cho; Sally Wong |
| Abstract: | This paper conducts a counterfactual analysis on the effect of adopting the euro on regional income and disparity within Denmark and Sweden. Using the synthetic control method, we find that Danish regions would have experienced small heterogeneous effects from adopting the euro in terms of GDP per capita, while all Swedish regions are better off without the euro with varying magnitudes. Adopting the euro would have decreased regional income disparity in Denmark, while the effect is ambiguous in Sweden due to greater convergence among noncapital regions but further divergence with Stockholm. The lower disparity observed across Danish regions and non-capital Swedish regions as a result of eurozone membership is primarily driven by losses suffered by high-income regions rather than from gains to low-income regions. These results highlight the cost of foregoing stabilisation tools such as an independent monetary policy and a floating exchange rate regime. For Sweden in particular, macroeconomic stability outweighs the potential efficiency gains from a common currency. |
| Keywords: | currency union, euro, synthetic control method, regional income disparity |
| JEL: | C21 E65 F45 O52 R1 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-88&r= |
| By: | Riedler, Jesper; Koziol, Tina |
| Abstract: | We develop a portfolio balance model to analyze the impact of euro area quantitative easing (QE) on asset yields. Our model features two countries each populated by two agents representing their respective banking and mututal fund sectors. Agents, which differ in their preferences for assets, can trade currencies, bonds and equities. In simulations of the calibrated model we find that 10-year euro area bond returns decline by 31 basis points in response to €1 trillion in central bank bond purchases, which is in line with the empirical literature. QE leads to a substantial flattening of the yield curve and increasing the maturity of purchased bonds increases the average yield impact. When QE is unwound, yields increase quicker than the central bank balance sheet shrinks. This is because the yield impact scales non-linearly with increasing asset purchases. When assessing the potential impact of green QE, we find that it is slightly less effective in reducing bond yields than conventional QE. However, the spread between green and brown bond yields decreases with conventional QE while it increases with green QE. |
| Keywords: | euro area QE,portfolio balancing channel,yield curve,green QE |
| JEL: | C63 G11 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21086&r= |
| By: | Lucrezia Reichlin; Giovanni Ricco (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Matthieu Tarbé |
| Abstract: | We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany's fiscal policy during the period in which unconventional monetary policy was adopted. |
| Keywords: | monetary-fiscal interaction,fiscal policy,monetary policy,intertemporal government budget constraint |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03474950&r= |
| By: | Martin Hodula; Ngoc Anh Ngo |
| Abstract: | We examine whether macroprudential policy actions affect shadow bank lending. We use a large dataset covering 23 European Union countries and synthesize a narrow measure of shadow banking focused on capturing credit intermediation by non-banks. To address the endogeneity bias inherent to modelling of the effects of macroprudential policy on the financial sector, we consider a novel index of the macroprudential authority's strength in pursuing its goals and use it to instrument for a macroprudential policy variable in an IV estimation framework. We robustly demonstrate that following a macroprudential policy tightening, shadow bank lending increases. We harness the cross-sectional dimension of our data to show that the effect applies especially to low-capitalized banking sectors, where macroprudential policy is expected to be more binding, leading to credit reallocation from banks to non-banks. |
| Keywords: | European Union, instrumental variables, macroprudential policy, non-bank lending, regulatory leakages |
| JEL: | G21 G23 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/5&r= |
| By: | Mihaela Simionescu (Institute for Economic Forecasting of the Romanian Academy); Mihaela-Daniela Vornicescu (Niculescu) (Institute for Economic Forecasting of the Romanian Academy) |
| Abstract: | In the context of a Sustainable Europe by 2030, this paper evaluates the impact of EU membership of new member states on indicators related to sustainable development (GDP growth and unemployment rate). The analysis for the period 1995-2020 Ð based on the 13 most recent member states of the EU and Ð suggests that EU membership did not contribute to GDP growth, but reduced unemployment due to labor migration to early member states and other developed countries. Some policy recommendations are made to achieve a sustainable growth in the EU new member states as EuropeÕs 2030 strategy requires. |
| Keywords: | GDP; unemployment; migration; sustainable development; panel data models |
| JEL: | C51 C53 J64 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2022-02&r= |
| By: | Volha Audzei |
| Abstract: | International spillovers in estimated multi-country DSGE models with trade are usually limited. The correlation of nominal and real variables across countries is small unless correlation of exogenous shocks is imposed. In this paper, I show that introducing adaptive learning (AL) with time-varying coefficients as in Slobodyan and Wouters (2012b and 2012a) increases the international correlation. I use an estimated large-scale model as in de Walque et al. (2017), which has reasonable forecasting performance under rational expectations (RE). The model features the euro area, the US, and an exogenous rest of the world, with endogenous exchange rate determination. I show that the increase in international correlation stems from the varying coefficients and the use of simple forecasting models. The increase in the correlation of international variables goes through two channels: larger shock spillovers through the exchange rate, and correlated adjustment of agents' forecasting model coefficients. |
| Keywords: | Adaptive learning, Bayesian estimation, Multi-Country DSGE |
| JEL: | D83 D84 E17 E31 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/7&r= |
| By: | Larch, Martin; Busse, Matthias; Jankovics, László |
| Abstract: | In 2012, 22 EU countries signed the Fiscal Compact, an intergovernmental agreement aimed at backing EU fiscal rules with national arrangements. The main objective of the Compact was to strengthen compliance. Based on a survey of national independent fiscal institutions, we take a closer look at the correction mechanism, the core of the Fiscal Compact. As the name suggests, the correction mechanism is meant to automatically trigger fiscal adjustment in case public finances deviate from 'the path of virtue'. While design choices vary considerably across countries, a cluster analysis reveals distinct patterns. In particular, better compliance tend to be associated with a superior design of the correction mechanism, higher government efficiency and a stronger media presence of independent fiscal institutions. Economic growth can make up for a less sophisticated design. Additional inferential analysis confirms the link between compliance, design and other relevant valiables. Our survey also indicates that many countries have linked the trigger of the correction mechanism to formal decisions at the EU level rather than to independent assessors at the national level. This choice defeats the original purpose of correction mechanisms, namely to decouple key fiscal policy decisions from political considerations and discretion. |
| Keywords: | Fiscal policy,fiscal governance,budgetary forecasts,correction mechanism,Fiscal Compact,independent fiscal institutions,fiscal councils |
| JEL: | E62 H62 H68 H77 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21085&r= |
| By: | Eloi Flamant (EU Tax - EU Tax Observatory); Sarah Godar (EU Tax - EU Tax Observatory); Gaspard Richard (EU Tax - EU Tax Observatory) |
| Abstract: | This report provides an empirical analysis of personal and corporate tax competition in the European Union. We find that tax competition increasingly takes the form of preferential or narrowly targeted tax regimes on top of general rate cuts. We provide a ranking of the most harmful regimes targeting foreign, primarily highincome or high-wealth individuals. We also discuss several options to address these trends. The evolution of tax competition in the European Union may be summarized as follows. While corporate tax rates are still on a downward trend, the decline of top statutory personal income tax rates has stopped since the financial crisis of 2008–2009. In the meantime, many new preferential regimes have been introduced into the personal income tax systems of member states. Many base-narrowing measures also contribute to lowering corporate tax burdens. By targeting the most mobile parts of the tax base - high-income earners and multinational enterprises - these tax incentives undermine effective revenue collection in the European Union and weaken the horizontal and vertical equity of tax systems. The most striking trend in EU tax competition is the increase in the number of personal income tax schemes targeting foreign individuals. The number of such regimes has increased from 5 in 1995 to 28 today. A tentative ranking suggests that the most harmful ones are the Italian and Greek high-net-worth individual regimes, Cyprus' high-income regime and the pension regimes of Cyprus, Greece and Portugal. These regimes exhibit long periods of duration, provide significant tax advantages, specifically target very high-income individuals or do not require any real economic activity in a given member state. At present, preferential regimes apply to over 200,000 beneficiaries. A lower-bound estimation suggests that the total fiscal costs for the European Union amount to EUR 4.5 billion per year. This sum is equivalent e.g. to the annual budget of the entire Erasmus programme. Member states also apply numerous base-narrowing measures which have the potential to significantly lower the effective tax rate of multinationals. Public financing of corporate research and development has increased in recent decades and has increasingly taken the form of tax incentives. A total of 14 intellectual property regimes in the EU are currently designed to tax income associated with patents, software and similar intangible assets at rates of 15% or less (10% or less in half of these cases). Six countries have adopted regimes of notional interest deduction; the Maltese and Cypriot regimes seem exceptionally generous. Approximately 1,348 unilateral tax rulings concerning multinationals' tax arrangements were in force in 2019. The implications of these rulings for revenue collection are still unknown to the public. The trends uncovered by this report may be addressed in several ways, e.g. by reforming the Code of Conduct and transforming it into a binding instrument – and extending its mandate to personal income taxation as well as to non-preferential corporate tax regimes that lead to generally low levels of taxation of multinationals. In the absence of a coordinated approach (which is always the ideal solution), member states might consider unilaterally taxing their expatriates, which, under some conditions, may mitigate the effects of preferential personal income tax regimes. A comprehensive implementation of the global corporate minimum tax agreed in October 2021, with minimal carveouts and limited deductions for research and development, could provide an effective floor for the EU's race to the bottom in corporate taxation. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03461688&r= |
| By: | Melisso Boschi; Valeria Bevilacqua; Carla Di Falco |
| Abstract: | We quantify the effect of property tax reforms implemented in Italy in 1993 and 2012 on property prices. We focus on the Italian house prices index using the Interrupted Time Series Analysis (ITSA), a statistical approach that proves to be useful when a counterfactual scenario for policy evaluation is difficult to create due to the universality of intervention. The hypothesis under test is that the two reforms caused a statistically significant discontinuity in the house prices index dynamics. We estimate two alternative versions of the ITSA model ─ one including only Italy, and another one including also similar European countries as control terms (France, Germany, Spain, and the UK). Property tax changes effects are reform-specific. As for the 1993 reform effect on real house prices, we estimate a 13-14 percent decrease of the mean level and a 1 percentage points (p.p.) increase of the rate of growth. As for the 2012 reform, depending on the model chosen, we estimate a 3-5 percent decrease, or a 4 percent increase, in level, as well as a 3-4 p.p. decrease, or a 2 p.p. increase, of the rate of growth. |
| Keywords: | Policy effect evaluation, Property tax, House prices, Property tax capitalization, Tax reforms, Interrupted Time Series Analysis |
| JEL: | C32 H20 R21 R31 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-82&r= |
| By: | Beck, Thorsten; Cecchetti, Stephen G.; Grothe, Magdalena; Kemp, Malcolm; Pelizzon, Loriana; Sánchez Serrano, Antonio |
| Abstract: | This report discusses the impact of digitalization on the structure of the European banking system. The recent wave of financial innovation based on the opportunities digitalisation offers, however, has come mostly from outside the incumbent banking system in the form of new financial service providers, either in competition or cooperation with incumbent banks but with the potential for substantial disruption. After discussing how identified risks may evolve and the emergence of new sources of risks, the report introduces three different scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) central bank digital currencies (under certain specifications). It also derives macroprudential policy measures. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkasc:202212&r= |
| By: | Keuschnigg, Christian; Johs, Julian; Stevens, Jacob |
| Abstract: | One of the main functions of public debt is to smooth taxes and spending over time. In the Covid crisis, the Maastricht deficit restrictions were temporarily suspended to allow for large temporary deficits. As recovery sets in, countries are confronted with the task of consolidating the Covid debt. This paper explores a fiscal consolidation strategy combined with growth enhancing tax and expenditure reform. We quantitatively illustrate that this reform-based strategy, by reaping substantial efficiency gains and inducing strong growth, eliminates the Covid debt, protects per capita social entitlements and yet avoids increasing tax rates. With slow consolidation, marginal tax rates are reduced right from the beginning. |
| Keywords: | Covid debt, fiscal consolidation, tax and expenditure reform, growth |
| JEL: | E62 H24 H25 H55 H63 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2021:12&r= |