nep-eec New Economics Papers
on European Economics
Issue of 2022‒03‒28
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal sustainability, fiscal reactions, pitfalls and determinants By António Afonso; José Carlos Coelho
  2. The ECB's neglected secondary mandate: An inter-institutional solution By de Boer, Nik; van 't Klooster, Jens
  3. Determinants of NMD Pass-Through Rates in Eurozone Countries By Milan Fičura; Jiří Witzany
  4. Effects of Cross Country Fiscal Interdependence on Multipliers within a Monetary Union. By Kunzmann Vanessa
  5. Stock Market Response to Covid-19, Containment Measures and Stabilization Policies - The Case of Europe By Jens Klose; Peter Tillmann
  6. Flash crashes on sovereign bond markets – EU evidence By Antoine Bouveret; Martin Haferkorn; Gaetano Marseglia; Onofrio Panzarino
  7. Wealth Heterogeneity and the Marginal Propensity to Consume out of Wealth By Bertrand Garbinti; Pierre Lamarche; Fredérique Savignac
  8. Extensions of the Energy PUblic Policy Model for Austria and other European countries E-(PuMA) By Berger, Johannes; Strohner, Ludwig
  9. Evolution of fiscal systems: Convergence or divergence? By Paloma Péligry; Xavier Ragot
  10. Crypto-assets better safe-havens than Gold during Covid-19: The case of European indices By Alhonita Yatie
  11. Financial Transaction Tax, macroeconomic effects and tax competition issues: a two-country financial DSGE model By Olivier Damette; Karolina Sobczak; Thierry Betti
  12. Can a country borrow forever? The unsustainable trajectory of international debt: the case of Spain By Vicente Esteve; María A. Prats
  13. Profit smoothing of European banks under IFRS 9 By Oľga Jakubíková
  14. EU in Search of a WTO-Compatible Carbon Border Adjustment Mechanism By Cecilia Bellora; Lionel Fontagné
  15. On the Choice of Central Counterparties in the EU By Gabrielle Demange; Thibaut Piquard

  1. By: António Afonso; José Carlos Coelho
    Abstract: We examine the sustainability of public finances and its determinants for 19 Eurozone countries from 1995 to 2020. We conclude for the existence of panel cointegration between government revenues and expenditures; primary government balance and one-period lagged public debt-to-GDP ratio; and public debt-to-GDP ratio and one-period lagged primary government balance. the estimated fiscal reaction functions suggest the existence of a Ricardian fiscal regime. Finally, modelling via time-varying coefficients, we find that fiscal sustainability increases with growth, fiscal balances and fiscal rules indices, and decreases with trade openness, current account balances, government effectiveness index, after 2010, and with sovereign ratings assigned by the main rating agencies.
    Keywords: fiscal sustainability; budget balance; public debt; panel data; time-varying coefficients; Eurozone, sovereign ratings.
    JEL: C23 H61 H63 E62
    Date: 2022–03
  2. By: de Boer, Nik; van 't Klooster, Jens
    Abstract: The ECB’s secondary mandate requires it to the support broader economic policies by and in the EU. Until recently absent from the ECB strategy, the secondary mandate features prominently in the ECB’s 2021 review of its monetary policy strategy. This report asks: How should the ECB interpret the many objectives that the secondary mandate mentions? And how should it act on them? A more prominent role for its secondary mandate fits well with the new, more political role of the ECB, but it should not act on the secondary mandate alone. Why is that? The requirements that the legal text imposes on the ECB are paradoxical and difficult to reconcile. We explain the paradox in terms of three features. Firstly, the secondary mandate is binding on the ECB so that it must support the EU’s economic policies where this is possible without prejudice to price stability. However and secondly, the secondary mandate is also highly indeterminate because there are many relevant secondary objectives and ways to support them. Acting on the secondary mandate requires prioritising objectives and designing new instruments. Yet, thirdly, the ECB lacks the competence to develop its own policies to pursue the secondary objectives. For the ECB to simply choose its own secondary objectives and act on them raises severe legal and democratic objections. To resolve this paradoxical situation, we propose that the specification of the secondary objectives should take place via high-level coordination with the political institutions of the EU. Unlike direct instructions which are illegal under EU law, coordination would be compatible with central bank independence and strengthen the ECB’s ability to pursue price stability. We propose three main avenues to give shape to such interinstitutional coordination.
    Date: 2021–10–24
  3. By: Milan Fičura; Jiří Witzany
    Abstract: Non-Maturing Deposit (NMD) pass-through rate represents a key parameter needed in the process of interest rate management of the banking book (IRRBB). NMD interest rates for retail and corporate segments are usually not directly linked to the market interest rates, but depend rather on the bank's marketing strategy, market competition, liquidity, and possibly on other factors. The ratio in which banks adjust their NMD interest rates to the changes of the interbank market interest rates is known as the NMD pass-through rate. The goal of this paper is to analyse the variability of NMD pass-through rates in the 19 Eurozone countries and identify their possible determinants. The pass-through rates are estimated using cointegration analysis based on datasets available from the ECB Statistical Data Warehouse and the results show significant variability between countries. To analyse the determinants of pass-through rates in the Eurozone, the rates are regressed on 9 aggregates of country-level banking sector including concentration, profitability, or funding. Out of the tested predictors, surprisingly only the ratio of Wholesale Funding to Liabilities proves to impact the pass-through rates significantly, with a positive sign, indicating that countries where banks rely more heavily on wholesale funding exhibit higher pass-through of the market interest rate changes to the NMD deposit rates.
    Keywords: Non-Maturing Deposits (NMD), pass-through rate, IRRBB
    JEL: C32 E43 E58 G21
    Date: 2021–11–30
  4. By: Kunzmann Vanessa
    Abstract: This paper analyzes the e ects of time-varying fiscal policy behavior on output and consumption multipliers within a monetary union. The framework is that of a standard New Keynesian two-country model with distortionary taxes and Calvo price rigidities. I first show that multipliers differ significantly across fiscal regime mixes that follow a two-state Markov switching process. For each country, I differentiate between active, where spending is mainly deficit-financed, and passive, when spending is mainly tax-financed, behavior. Since this analysis is based on the Euro Area, I abstract from fiscal-monetary interaction and focus on member and union fiscal interdependence, including monetary imperfections and trade e ects. My calibration results show that consumption multipliers to be small and negative. However, the output multiplier is positive and possibly larger than one, depending on the persistence and openness of a country. Moreover, the optimal fiscal regime mix is a combination of active/passive since the negative wealth effect is lowest and the terms of trade loss are the smallest.
    Keywords: oFiscal Policy; Fiscal Multiplier; Multiplier; European Monetary Union; Regime Switching; Fiscal Policy Rules.
    JEL: R0 R11 R14 R21 R31
    Date: 2022–02
  5. By: Jens Klose (THM Business School Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Policymakers imposed constraints on public life in order to contain the Covid-19 pandemic. At the same time, fiscal and monetary policy implemented a large range of of expansionary measures to limit the economic consequences of the pandemic and stimulate the recovery. In this paper, we assess the response of the equity market as a high-frequency indicator of economic activity to containment and stabilization policies for 29 European economies. We construct indicators of containment and stabilization policies and estimate a range of panel VAR models. The main results are threefold: First, we find that stock markets are highly responsive to containment and stabilization policies. We show that domestic fiscal policy as well as monetary policy support the recovery as reflected in the stock market. Second, expansionary fiscal policy conducted at the European level reduces rather raises stock prices. Third, we estimate the model over subsamples and show that the counter-intuitive stock market response to EU policies is driven by the responses in medium- and high-debt countries. These countries' stock markets are also particularly susceptible to monetary policy announcements.
    Keywords: COVID-19, stabilization policies, lockdown-measures, panel VAR
    JEL: E44 E52 E62
    Date: 2022
  6. By: Antoine Bouveret (European Securities and Markets Authority); Martin Haferkorn (European Securities and Markets Authority); Gaetano Marseglia (Bank of Italy); Onofrio Panzarino (Bank of Italy)
    Abstract: The development of electronic and automated trading in sovereign bond markets has been accompanied by a more frequent occurrence of flash crashes, i.e. episodes of sudden and abrupt price changes that are to a large extent reversed shortly afterwards. We focus our analysis on two flash events in the German and Italian bond markets and show how liquidity vanished ahead of the crashes, resulting in trades having a large price impact on prices. We document that, during the flash event of 29 May 2018, activity on Italian bonds futures and cash markets diverged: trading activity in futures surged, while it plummeted on the cash market. In addition, we show that the effects of flash events on the liquidity in the affected markets can last up to several weeks. Our findings call for increased monitoring of electronic trading markets, taking into account the pace of financial innovation, and for pursuing more integrated approaches in the presence of highly interlinked markets.
    Keywords: Market liquidity, flash crash, sovereign bonds.
    JEL: G01 G10 G12 G18
    Date: 2022–03
  7. By: Bertrand Garbinti (CREST-ENSAE-Institut Polytechnique Paris); Pierre Lamarche (CREST-INSEE); Fredérique Savignac (Banque de France)
    Abstract: We study how the marginal propensity to consume out of wealth (MPC) varies across households depending on the level and composition of their wealth. We build a unique household-level panel dataset which combines wealth and consumption surveys for five European countries to estimate country-specific marginal propensity to consume out wealth. We use instrumented household-level panel regressions. First, we show that the MPC out of total wealth is higher for lowwealth households, whatever the country. Second, we find that the MPC out of housing assets is significant and decreasing along the wealth distribution in all countries. Third, we show that the observed cross-country heterogeneity in MPC is strongly correlated with the use of mortgages, suggesting a collateral channel. Finally, we conduct a simulation exercise to investigate to what extent heterogeneous MPC and wealth inequality affect consumption inequality.
    Keywords: consumption, marginal propensity to consume out of wealth, collateral channel, household surveys
    JEL: D12 E21 C21
    Date: 2022–01–19
  8. By: Berger, Johannes; Strohner, Ludwig
    Abstract: This Research Paper contains a documentation of extensions of the dynamic computable general equilibrium model PuMA to implement energy and greenhouse gas emissions (GHG). The documentation of the PuMA model is published in EcoAustria Research Paper No. 11. Up to now, the model was applied to analyse economic, labour market and public finance effects of different policy reforms, structural changes and other important policy questions. PuMA is similar to the EU Labour Market Model (EU-LMM), which was also developed by the authors and is used by the Directorate General Employment, Social Affairs & Inclusion of the European Commission.1 E-PuMA extends the model by implementing important channels of energy demand of private households and firms as well as GHG emissions. E-PuMA implements additional demand nests for private households. This allows to model the impact of energy price changes on demand and various policy reforms like CO2 related prices. In addition to final goods and investment goods firms additional types of firms are implemented. Electricity firms produce electricity by different kinds of energy inputs and corresponding capital stock and provide electricity to private households and the energy firms. Energy firms combine different energy inputs together with capital and electricity to produce energy provided to final goods firms. Final goods firms demand energy and decide about abatement effort with respect to non-energy-related emissions. Section 2 describes extensions related to private households, Section 3 extensions related to firms, Section 4 describes changes related to functional forms, and Section 5 discusses relevant literature for the calibration of the model.
    Date: 2022
  9. By: Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this article is to analyze, more than ten years after the financial crisis of 2007, the convergence or divergence of the diversity of capitalism, focusing on the fiscal systems. Studying 29 countries, we first analyse the evolution of the taxation of households, firms, labour, consumption and capital. Then we use recent statistical method to indentify three types of fiscal systems: liberal, intermediate, and social-democratic, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. The first result of this analysis is that only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates, on labour or capital tax on households, show rather signs of divergence. Second, we show the divergence of the liberal and social-democratic group over the period. The European countries are converging towards the social-democratic model, with the exception of Great Britain, which is moving towards the liberal model over the period. Hence, the analysis shows that the divergence of fiscal systems is compatible with the convergence of certain taxes on the most mobile factors during a strong period of trade internationalization. Thus, the financial crisis does not seem to contribute to the convergence, but to the divergence of fiscal systems.
    Keywords: fiscal systems,globalization,capital taxation
    Date: 2022–02–03
  10. By: Alhonita Yatie (BSE)
    Abstract: As the first crisis faced by Crypto-assets, Covid-19 updated the debate about their safehaven properties. Our paper tries to analyze the safe-haven properties of Crypto-assets and Gold for European assets. We find that Gold has not been more efficient than Cryptoassets (Tether, Cardano and Dogecoin) as safe-haven during the market crash due to Covid-19 in March 2020. We also found that during the study period Bitcoin, Ethereum, Litecoin and Ripple were just diversifiers for the European indices. Finally, Tether, Cardano and Dogecoin showed hedging properties like Gold before and after the market crash.
    Date: 2022–02
  11. By: Olivier Damette; Karolina Sobczak; Thierry Betti
    Abstract: We document how introducing a financial transaction tax affects real and financial activity in a general equilibrium framework. Our model replicates some interesting stylised facts about financial markets. Informed, or rational, traders follow the standard rational expectations, while exogenous disturbances, such as optimism or pessimism shocks, affect the expectations of noise traders. An entry cost is introduced to endogenise the entry of noise traders in the financial markets. In contrast to the previous literature, financial contagion and international spillovers are considered in a two-country financial DSGE model. A welfare analysis is performed and we show that the effects of the financial transaction tax on welfare are non-linear and mainly depend on the composition of the financial market. In addition, introducing a financial transaction tax allows volatility to be reduced in both the real and financial sectors, and this result is robust to several model specifications. In a context where only one country implements the tax, we identify some externalities, as the country with the tax is likely to export stability or instability through the flows of traders. Like in the Heckscher-Ohlin-Samuelson (HOS) model in which capital and labor move internationally when countries trade, we assume that there are trader flows when traders invest abroad. As a consequence, noise traders can implicitly move to the foreign country to escape the tax, and this means that countries have conflicting interests. When markets are liquid with a large proportion of noise traders, countries do not internalise that they export noise traders and then some instability to the other market and so they set a tax rate that is higher than the optimal. At the opposite end of the scale, when markets are less liquid and the proportion of noise traders is small, some positive externalities (like financial stability) are overlooked, and so the tax rate is set too low and is sub-optimal. A cooperative situation where countries set a common tax rate is the best solution ans is welfare-enhancing. These results have important policy implications, since the existence of the tax competition issues revealed by our two-country framework might explain why the European Commission proposal initially discussed in 2011 is so contested and has been rejected by several countries.
    Keywords: Financial Transaction Tax, DSGE, Welfare, Noise Traders, Tax coordination, EU tax project.
    JEL: E22 E44 E62
    Date: 2022–03–24
  12. By: Vicente Esteve (Universidad de Valencia and Universidad de Alcalá, Spain); María A. Prats (Universidad de Murcia, Spain)
    Abstract: We address the issue of the sustainability Spain's external debt, using data for the period 1970-2020. To detect episodes of potentially explosive behavior of the Spanish net foreign assets over GDP ratio and the current account balance over GDP ratio, as well as episodes of external adjustments over this long period, we employ a recursive unit root test approach. Our empirical analysis leads us to conclude that there is some evidence of bubbles in the ratio between Spanish net foreign assets and the GDP. In contrast, the evidence that the ratio between the Spanish current account balance and the GDP had explosive subperiods is very weak.The episode of explosive behavior identified in the position of net foreign assets during the period 2002-2015 was the result of the country's economic expansion 1995-2007. The results also show an external adjustment during the period 2008-2019 after the start of a cyclical economic recession.
    Keywords: external imbalances; sustainability; intertemporal external budget constraint; explosiveness; recursive unit root test
    JEL: F32 F36 F37 F41 C22
    Date: 2022–03
  13. By: Oľga Jakubíková
    Abstract: The aim of this paper is to examine whether banks engage in profit smoothing using loan loss provisions under the new provisioning rules according to IFRS 9. Due to relatively loose definitions of provisioning principles and use of macroeconomic predictions under IFRS 9, there is certain managerial discretion expected allowing banks to reduce the variability of profits over time using loan loss provisions. The hypothesis that banks use loan loss provisions to smooth their profits under IFRS 9 was tested with panel regression analysis on the panel of 27 EU member countries for period 1Q2015 - 2Q2021. The evidence of profit smoothing was not confirmed neither in IFRS 9, nor in IAS 39 period, therefore, the hypothesis was rejected on 1% significance level.
    Keywords: IFRS 9, loan loss provisions, profit smoothing
    JEL: G12 G21 G32
    Date: 2022–01–26
  14. By: Cecilia Bellora; Lionel Fontagné
    Abstract: To meet the targets of the EU’s ”Fit for 55” package, the European Commission proposes to implement a Carbon Border Adjustment Mechanism (CBAM). The CBAM is firstly intended to avoid carbon leakages, but it also deals with the thorny issue of the compliance by European producers in carbon-intensive industries. In addition, its design, as voted by the European Council on March 15, 2022, questions the compatibility of the CBAM with World Trade Organization (WTO) rules. The CBAM puts a price on carbon contained in imported products whose production-related emissions have not been taxed (or not at the same level as in the European Union) by the exporter country, in order to offset the difference in carbon prices at the border. This paper aims to quantify the economic and environmental impacts of different CBAM design choices with the aim of complying with WTO rules. Different from the previous literature, we evaluate the various options with a dynamic general equilibrium model featuring imperfect competition, global value chains, green-house gas emissions and endogenous price of emission quotas. We show that CBAM is effective in reducing carbon leakages. But its design leads to an increase in the price of carbon quotas in the European Emission Trading System (ETS) market. Losses in competitiveness on export markets are expected, also for downstream sectors not covered by the EU ETS nor the CBAM. Eventually, offsetting the difference in carbon prices at the border comes at a cost to the enforcing jurisdiction, suggesting that the CBAM was not designed as a beggar-thy-neighbour policy.
    Keywords: Carbon Border Adjustment;International Trade;Climate Change
    JEL: F14 F13 F17 Q56
    Date: 2022–03
  15. By: Gabrielle Demange; Thibaut Piquard
    Abstract: New regulations promote the role of Central Counter-Parties (CCPs) as insurers of counterparty risk to stabilize derivative markets. Focusing on the demand side, we investigate how pairs of dealers choose the CCP on which they clear a given transaction. We use transaction data on three main CDS indices and focus on major dealers who are members of the two EU CCPs. Descriptive analysis shows that dealers do not optimize their positions across CCPs. Then, we build and test a reduced form model of CCP's choice. Differences in transaction size, two indicators of CCP's robustness and activities, squared positions to account for dealers' risk aversion, and market volatility affect this choice, but not the collateral costs, proxied by the dealers' positions.
    Keywords: Central Counter-Party, Central Clearing, Dealers, Collateral
    JEL: G20 G23 G18 G33
    Date: 2022

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