nep-eec New Economics Papers
on European Economics
Issue of 2022‒02‒21
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Twin Deficits through the Looking Glass: Time-Varying Analysis in the Euro Area By António Afonso; José Carlos Coelho
  2. Business cycles in the EU: A comprehensive comparison across methods By Mariarosaria Comunale; Dmitrij Celov
  3. Heterogeneity, co-movements and financial fragmentation within the euro area By Arce-Alfaro, Gabriel; Blagov, Boris
  4. A Tiering Rule to Balance the Impact of Negative Policy Rates on Banks By Jean-Guillaume Sahuc; Mattia Girotti; Benoît Nguyen
  5. Monetary/Fiscal Interactions with Forty Budget Constraints By Marco Bassetto; Gherardo Gennaro Caracciolo
  6. Is a 10 trillion euro European climate investment initiative fiscally sustainable? By Rafael Wildauer; Stuart Leitch; Jakob Kapeller
  7. Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios By Alessi, Lucia; Battiston, Stefano
  8. Inflationary household uncertainty shocks By Ambrocio, Gene
  9. Begging thy coworker – Labor market dualization and the slow-down of wage growth in Europe By Lehner, Lukas; Ramskogler, Paul; Riedl, Aleksandra
  10. Productivity Growth and Spillovers across European Industries: A Global Value Chain Perspective Based on EURO KLEMS By Liu, Weilin; Cheng, Qian; Sickles, Robin C.
  11. Intangible Assets, Industry Performance and Finance During Crises By Carlo Altomonte; Peter Bauer; Alberto Maria Gilardi; Chiara Soriolo
  12. Unintended side effects of unconventional monetary policy By Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
  13. Currency demand at negative policy rates By Edoardo Rainone
  14. Nowcasting the state of the Italian economy: the role of financial markets By Donato Ceci; Andrea Silvestrini
  15. Firms in (Green) Public Procurement: Financial strength indicators’ impact on contract awards and its repercussion on financial strength By Christopher F Baum; Arash Kordestani; Dorothea Schäfer; Andreas Stephan
  16. The Welfare Costs of Inflation By Luca Benati; Juan Pablo Nicolini
  17. Monetary policy and inequality : The Finnish case By Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha

  1. By: António Afonso; José Carlos Coelho
    Abstract: Using two measures of the fiscal position, the cyclically adjusted primary budget balance (CAPB) and the total budget balance, we assess the Twin Deficit Hypothesis for the Euro Area in the period 1995-2020. Furthermore, we estimate time-varying coefficients of the current account balance responses to changes in the CAPB and in the government balance and we identify the determinants of these responses. The CAPB and the government balance, in addition to being determinants of the current account balance, are also determinants of the time-varying responses of the current account balance. The levels of government balance, current account balance and public debt, as a percentage of GDP, and the temporal period (before and after 2010) also influence these responses.
    Keywords: CAPB; government balance; current account balance; time-varying coefficients; Eurozone; panel data.
    JEL: F32 F41 H62 C33
    Date: 2022–01
  2. By: Mariarosaria Comunale (Bank of Lithuania); Dmitrij Celov (Vilnius University)
    Abstract: Recently, star variables and the post-crisis nature of cyclical fluctuations have attracted a great deal of interest. In this paper, we investigate different methods of assessing business cycles for the European Union in general and the euro area in particular. First, we conduct a Monte Carlo experiment using a broad spectrum of univariate trend-cycle decomposition methods. The simulation aims to examine the ability of the analyzed methods to find the observed simulated cycle with structural properties similar to actual macroeconomic data. For the simulation, we used the structural model’s parameters calibrated to the euro area’s real GDP and unemployment rate. The simulation outcomes indicate the sufficient composition of the suite of models consisting of popular HodrickPrescott, Christiano-Fitzgerald and structural trend-cycle-seasonal filters, then used for the real application. We find that: (i) there is a high level of model uncertainty in comparing the estimates; (ii) growth rate (acceleration) cycles have often the worst performances, but they could be useful as early-warning predictors of turning points in growth and business cycles; and (iii) the best-performing Monte Carlo approaches provide a reasonable combination as the suite of models. When swings last less time and/or are smaller, it is easier to pick a good alternative method to the suite to capture the business cycle for real GDP. Second, we estimate the business cycles for real GDP and unemployment data varying from 1995Q1 to 2020Q4 (GDP) or 2020Q3 (unemployment), ending up with 28 cycles per country. Our analysis also confirms that the business cycles of euro area members are quite synchronized with he aggregate euro area. Some major differences can be found, however, especially in the case of periphery and new member states, with the latter improving in terms of coherency after the global financial crisis. The German cycles are among the cyclical movements least synchronised with the aggregate euro area.
    Keywords: : business cycle, growth cycle, European Union, real GDP, unemployment rate, trend-cycle decomposition, synchronization
    JEL: C31 E27 E32
    Date: 2021–08–26
  3. By: Arce-Alfaro, Gabriel; Blagov, Boris
    Abstract: In this article we analyse the degree of commonality across euro area countries in the bank lending rates and credit volumes. Using a time-varying two-level dynamic factor model, we disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. There is heterogeneity across member states, specifically those hit hard by the crisis. We observe high commonality in the financial variables, which increases in periods of high financial volatility.
    Keywords: Co-movements,financial fragmentation,dynamic factor model
    JEL: C11 C38 E43 E52
    Date: 2021
  4. By: Jean-Guillaume Sahuc; Mattia Girotti; Benoît Nguyen
    Abstract: Negative interest rate policy makes excess liquidity costly to hold for banks and this may weaken the bank-based transmission of monetary policy. We design a rule-based tiering system for excess reserve remuneration that reduces the burden of negative rates on banks while ensuring that the central bank keeps control of interbank interest rates. Using euro-area data, we show that under the proposed tiering system, the aggregate cost of holding excess liquidity when the COVID-19 monetary stimulus fully unfolds would be more than 36% lower than that under the ECB’s current system.
    Keywords: Negative interest rates, excess liquidity, tiering system, bank profitability, interbank market
    JEL: E43 E52 G21
    Date: 2022
  5. By: Marco Bassetto; Gherardo Gennaro Caracciolo
    Abstract: It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized.
    Keywords: Monetary/fiscal interaction; Fiscal theory of the price level; Eurozone; TARGET2; Monetary union
    JEL: E63 E51 E58 E31 H63
    Date: 2021–12–02
  6. By: Rafael Wildauer (Department of International Business and Economics, University of Greenwich); Stuart Leitch (University of Greenwich); Jakob Kapeller (Institute for Socio-Economics, University of Duisburg-Essen, Germany; Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria)
    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: E62 Fiscal Policy; H63 Sovereign Debt
    Date: 2021–11
  7. By: Alessi, Lucia (European Commission); Battiston, Stefano (University Ca' Foscari of Venice)
    Abstract: We develop the first top-down method to estimate the greenness of financial portfolios, in terms of alignment to the EU Taxonomy for sustainable activities. We also develop a method to estimate, at the same time, the portfolio exposure to climate transition risk. We provide sector-level, standardized and transparent coefficients for both estimates, based on definitions of greenness and transition risk that are applicable across countries. We analyse the portfolios of Euro Area investors in 2020, based on the confidential Securities Holdings Statistics of the European Central Bank. We find that, overall, the greenness of Euro Area investors' portfolios is lower than their exposure to transition risk (1.3% vs. 5.5%). Across financial institutions, we estimate greenness and exposure to transition risk, respectively, at 1.4% and 6.1% for investment funds, at 0.3% and 1.7% for banks and at 1.2% and 5.0% for insurers. Our analysis also shows that investors with large amounts invested in green activities can have at the same time large exposures to transition risk.
    Keywords: greenness, climate transition risk, climate-related financial disclosures, EU Taxonomy, green financial flows
    JEL: G2 G3 Q54
    Date: 2021–12
  8. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks do not universally behave like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. Further analysis, including a comparison of results across countries, suggest that factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation.These results lend support to a pricing bias mechanism as an important transmission channel.
    JEL: D84 E30 E52 E71
    Date: 2022–02–14
  9. By: Lehner, Lukas; Ramskogler, Paul; Riedl, Aleksandra
    Abstract: Does the structure of labor markets – and the possibility to employ temporary workers – a↵ect aggregate wage growth? After the global financial crisis (GFC) a rich debate had ensued about the reasons for the delayed pick up of wage growth. However, structural labor market aspects remained strangely absent from this discussion. We contribute by incorporating labor market dualization into the standard Phillips curve model to explain wage growth in 30 European countries in the period 2004-2017. We find that the presence of workers with temporary contracts in Europe's labor markets slows down aggregate wage growth due to the competition that temporary workers exert on permanent workers. This competition e↵ect is most pronounced in countries, where trade union density is low. Moreover, we establish that labor market dualization has been at least as important in slowing wage growth since the GFC as unemployment, i.e. the observed flattening of the Phillips curve.
    Keywords: Wage Growth, Labor Market Dualization, Involuntary Temporary Work, Phillips Curve, Competition effect
    JEL: J31 J42 J82
    Date: 2022–01
  10. By: Liu, Weilin (Institute of Economic and Social Development, Nankai University); Cheng, Qian (Institute of Economic and Social Development, Nankai University); Sickles, Robin C. (Rice University,)
    Abstract: The development of production networks has promoted knowledge flows and technology diffusion among industries over the past decades, which affects the productivity growth for most countries. This paper examines productivity growth in the presence of inter-sectoral linkages. We construct a spatial production model with technological spillovers and productivity growth heterogeneity at the industry-level. We use the global value chain (GVC) linkages from inter-country input-output tables to model the technological interdependence among industries, and estimate the total factor productivity (TFP) growth and spillover for the European countries. We find that the spillover effects from intermediate inputs is significant. There is a network effect of TFP growth from one country to another through input-output linkages. Our paper provides a better understanding of the impact of spillover effects on TFP growth in the context of GVCs.
    JEL: C23 C67 O47
    Date: 2022–01
  11. By: Carlo Altomonte; Peter Bauer; Alberto Maria Gilardi; Chiara Soriolo
    Abstract: We take the global financial crisis (GFC), as an example of major crises, to study the trends of intangible investment, the link between industrial performance and intangible assets, and the differences of financing of intangible versus tangible assets during crises. We find an upward trend in investment intensities (investment-to-value added) for several kinds of intangible assets in almost all advanced EU countries, and in almost all sectors based on industry-level data. This trend started well before the GFC and the crisis had little impact on it, in contrast to tangible investment intensities, which declined a lot. Then we explore the potential role that intangible assets may play in weathering the negative effects of major crises using industry-level data. One of the main results about industrial performance is that pre-crisis R&D investment is robustly associated with economic resilience during the GFC, and higher productivity growth in the aftermath. Finally, we investigate how a financial turmoil may affect the financing of different assets. We combine insights from a macro (industry-level) and a micro (firm-level) approach to shed light on the importance of financial shocks in intangible investment. We find differences from tangible investment, mainly that tangibles are more sensitive to demand shocks, while intangible investment is more vulnerable to financial shocks. For the latter, our main explanation is that tight credit conditions create a trade-off between tangible and intangible investment financing.
    Keywords: productivity, financial crisis, resilience, intangible assets
    JEL: G01 D22 D24 G31
    Date: 2022
  12. By: Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
    Abstract: Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks' purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks' quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles.
    Date: 2022
  13. By: Edoardo Rainone (Bank of Italy)
    Abstract: Following the implementation of negative policy rates, interest rates on bank deposits reached their historic lows, with values close or equal to zero. This paper investigates the implications of such a new environment for the demand of currency. We find evidence of a structural break in the demand of currency when rates on deposits fall below 0.1 per cent. Exploiting time, bank and banknote denomination variation, as well as exogenous reforms that affected currency payments and holdings, our analysis finds that the increase of currency in circulation seems to be mostly driven by transactions instead of store-of-value demand.
    Keywords: financial stability, monetary policy, negative interest rates, deposits, zero lower bound, money demand
    JEL: E41 E42 E52 E58
    Date: 2022–02
  14. By: Donato Ceci (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: This paper compares several methods for constructing weekly nowcasts of recession probabilities in Italy, with a focus on the most recent period of the Covid-19 pandemic. The common thread of these methods is that they use, in different ways, the information content provided by financial market data. In particular, a battery of probit models are estimated after extracting information from a large dataset of more than 130 financial market variables observed at a weekly frequency. The predictive accuracy of these models is explored in a pseudo out-of-sample forecasting exercise. The results demonstrate that nowcasts derived from probit models estimated on a large set of financial variables are, on average, more accurate than standard probit models estimated on a single financial covariate, such as the slope of the yield curve. The proposed approach performs well even compared with probit models estimated on single time series of real economic activity, such as industrial production, or on composite PMI indicators. Overall, the financial indicators used in this paper can be easily updated as soon as new data become available on a weekly basis, thus providing a reliable real-time dating of the Italian business cycle.
    Keywords: financial markets, probit models, factor-augmented probit models, model confidence set, penalized likelihood, forecast evaluation
    JEL: C22 C25 C53 E32
    Date: 2022–02
  15. By: Christopher F Baum (Boston College; DIW Berlin); Arash Kordestani (Södertörn University); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Andreas Stephan (Linnaeus University; DIW Berlin)
    Abstract: We examine whether the financial strength of companies, in particular, small and medium-sized enterprises (SMEs) is causally linked to the award of a public procurement contract (PP), especially in the environmentally friendly “green” area (GPP). For this purpose, we build a combined procurement company data set from the Tenders Electronic Daily (TED) and the SME database AMADEUS, which includes ten European countries. First, we apply probit models to investigate whether the probability of winning the public tender depends on the company's financial strength. We then use the flexpanel DiD approach to investigate the question of whether the award has an impact on the future financial strength of the successful company. On the one hand, we find that a lower equity ratio and a higher short-term debt ratio increase the probability of being successful in a public tender. On the other hand, the success means that the companies can continue to work after the award with a lower equity ratio than comparable companies without an award, regardless of whether the company was successful in a traditional or a “green” public tender. We conclude from this that the success in a PP is a substitute for one's own financial strength and thus facilitates access to external financing. The estimation results differ depending on whether public procurement in general or the sub-group of sustainable public procurement is examined.
    Keywords: public procurement, green investment, public authorities, European Union
    JEL: H42 H44 C54
    Date: 2022–01–24
  16. By: Luca Benati; Juan Pablo Nicolini
    Abstract: We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation. We use data for the United States and several other developed countries. Our computations are heavily influenced by the recent experience of very low, even negative, short-term rates observed in the countries we study. We obtain estimates that range between 0.20% and 1.5% of lifetime consumption for the United States and find even higher values for some European countries.
    Keywords: Money demand; Lower bound on interest rates
    JEL: E41 E43 E52
    Date: 2021–09–24
  17. By: Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
    Abstract: We use Finnish household-level registry and survey data to study the effects of ECB’s monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households’ gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90th percentile to the 50th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile.
    JEL: D31 E32 E52
    Date: 2022–01–20

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