nep-eec New Economics Papers
on European Economics
Issue of 2022‒04‒04
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Rate forward guidance in an environment of large central bank balance sheets: a Eurosystem stock-taking assessment By Monetary Policy Committee, Taskforce on Rate Forward Guidance and Reinvestment
  2. EU trade policy reform: towards reciprocal concessions with developing countries By Gnutzmann-Mkrtchyan, Arevik; Volmer, Maximilian
  3. Brexit Spillovers: How Economic Policy Uncertainty Affects Foreign Direct Investment and International Trade By Xiaoqing An; William Barnett; Xue Wangd; Qingyuan Wu
  4. Identifying aggregate supply and demand shocks in small open economies By Patrik Barišić; Tibor Kovač; Vladimir Arčabić
  5. Should we worry about public debt? An empirical analysis of r – g in OECD countries. By Freddy Heylen; Marthe Mareels; Christophe Van Langenhove
  6. Immovable Property Taxation for Sustainable and Inclusive Growth By Alexander Leodolter; Savina Princen; Aleksander Rutkowski
  7. Out of sight, out of mind? Global chains, export, and credit allocation in bad times By Minetti, Raoul; Murro, Pierluigi; Peruzzi, Valentina
  8. A German inflation narrative. How the media frame price dynamics: Results from a RollingLDA analysis By Müller, Henrik; Schmidt, Tobias; Rieger, Jonas; Hufnagel, Lena Marie; Hornig, Nico
  9. Immigration Quotas and Anti-Immigration Attitudes: An Evaluation of Swiss Migration Policy By Qingyang Lin
  10. A micro perspective on r > g By Iacono, Roberto; Palagi, Elisa
  11. Absolute poverty measurement with minimum food needs: A new inverse method for advanced economies By Menyhert, Balint
  12. ifo DSGE Model 2.0 By Radek Šauer

  1. By: Monetary Policy Committee, Taskforce on Rate Forward Guidance and Reinvestment
    Abstract: In the aftermath of the global financial crisis, central banks started being confronted with severe challenges that led to an unprecedented policy response in terms of the size and variety of monetary policy measures. One such measure centred on central banks communicating to the public more explicitly their future policy actions in order to influence expectations. In the case of interest rates, as the standard policy rate approached the effective lower bound, major central banks began providing forward guidance (FG) on interest rates with the intention of lowering expectations of future short-term rates. While FG had been used in certain jurisdictions before the crisis, its prominence in the monetary policy toolkit grew substantially in the aftermath of the crisis. This occasional paper summarises the work carried-out by the Eurosystem Taskforce on the macroeconomic impact of rate forward guidance (FG) in an environment of large central bank balance sheets. The analysis presented covers the period up to February 2020 so the implications of the pandemic as well as the ECB’s strategy review are beyond the scope of the Taskforce’s mandate. The paper describes the analytical challenges associated with assessing rate FG on account of the relative novelty of these policies, the lack of well-established empirical results and the sensitivity of model predictions to the expectations formation process. To overcome and address these challenges, the Taskforce took stock of all the available infrastructure and analysis within in the Eurosystem, and where needed, developed structural and empirical models and approaches to assess the macroeconomic impact of rate FG in an environment of large central bank balance sheets. JEL Classification: E37, E43, E52, E58
    Keywords: ECB policy, effective lower bound, forward guidance, monetary policy
    Date: 2022–03
  2. By: Gnutzmann-Mkrtchyan, Arevik; Volmer, Maximilian
    Abstract: The European Union (EU) supports developing countries with a unilateral trade preference scheme. The scheme underwent a major reform in 2014, in which many countries lost access to reduced tariff rates. We analyse how this radical step that removed preferences from 103 countries by 2018 fits into the EU’s strategy to promote bilateral agreements and how it affected imports from the removed beneficiaries. Using the gravity model of trade with high-dimensional fixed effects, we show that the removal results in a significant decline in exports of affected developing countries. Some countries formed a bilateral free trade agreement with the EU, in which case the negative effect of removal of unilateral trade preferences is compensated but we do not find significant and consistent additional benefits. Thus, the threat of removal can be seen as a lever for beneficiaries that are about to become ineligible to negotiate a bilateral agreement with the EU.
    Keywords: trade preferences; reciprocity; GSP; FTA; gravity model
    JEL: F13 F14 O19 O24 D78
    Date: 2022–03
  3. By: Xiaoqing An (School of Economics, Jinan University, Guangzhou city, Guangdong Province, China); William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Xue Wangd (dInstitute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu, China and Department of Economics, Emory University, Atlanta, GA, U.S.); Qingyuan Wu (School of Economics and Management, Hanshan Normal University, Chaozhou, China)
    Abstract: We examine the Brexit spillovers on five major EU member states and the UK through economic policy uncertainty. Cluster analysis and TVP VAR model are applied to data from five major EU member states and the UK to analyze the impacts of economic policy uncertainty (EPU) on foreign direct investment (FDI) and international trade (TRADE) during Brexit. The results show that the impacts of EPU in six economies are different at different stages of Brexit. The impulse responses of FDI are relatively large in the Netherlands and the UK, especially in the short term. Moreover, in terms of strengths, the impulse responses of FDI are generally greater than those of TRADE. At the time points related to Brexit, the EPU of the Netherlands has the greatest impacts on its FDI and TRADE, followed by the UK. Furthermore, the duration of the impact of EPU on FDI is generally greater than that of EPU on TRADE. Overall, the Brexit spillovers induced by economic policy uncertainty can be grouped into three categories considering intensity: high impact for two economies (the Netherlands and the UK); medium impact for two economies (France and Spain); and low impact for two economies (Germany and Italy).
    Keywords: Brexit, Economic Policy Uncertainty, Foreign Direct Investment, International Trade.
    JEL: E0 F1 H0
    Date: 2022–03
  4. By: Patrik Barišić (Croatian National Bank); Tibor Kovač (Institute of Economics, Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper separates macroeconomic shocks into external and domestic aggregate demand and supply shocks in European Union's post-transition countries. Small open economies are typically very responsive to external shocks. The standard decomposition into aggregate demand and supply shocks covers up important information on the sources of business cycle fluctuations. Using a Bayesian SVAR model with combined sign and block exogeneity restrictions, we separately estimate external and domestic aggregate supply and demand shocks for GDP growth and inflation. We find that domestic shocks were a dominant source of fluctuations during the transition period in Croatia from 1992 to 2000. However, external shocks increased their importance with the trade and financial sector liberalization after 2000, becoming the dominant source of fluctuations with the Global financial crisis in 2008. In the short run, fluctuations are best explained by domestic shocks in 9 out of 11 analyzed countries, especially domestic supply shocks. However, in the medium run, fluctuations are dominantly explained by external aggregate demand shocks in 8 out of 11 countries. We argue that common sources of fluctuations in the medium run are beneficial for common monetary policy in the Eurozone.
    Keywords: small open economy, post-transition countries, aggregate supply and demand shocks, external and domestic shocks, Bayesian SVAR
    JEL: C32 C51 E32 F41
    Date: 2022–03–28
  5. By: Freddy Heylen; Marthe Mareels; Christophe Van Langenhove (-)
    Abstract: The difference between the implicit nominal interest rate and the growth rate of nominal GDP is a key determinant of the dynamics and the sustainability of public debt. This paper studies the determinants of r - g in a panel of 17 OECD countries since the early 1980s. Whereas the focus of existing studies is mainly on fiscal, monetary and financial drivers of the interest–growth difference, our approach and contribution are to include and highlight in particular the impact of real long-run drivers, such as technical progress, employment growth, components of demographic change, and income inequality. This allows us to derive empirically based projections for r - g beyond the next five or ten years. Our projections suggest that r - g remains negative for the next two decades in most European countries that we study, but not in the United States. The debt-carrying capacity of governments in Europe is structurally higher now than in recent decades. This allows to worry less about public debt, but does not exempt policy makers from the task to strongly monitor their expenditures and balances, given major challenges ahead.
    Keywords: public debt, r - g, fiscal sustainability, fiscal rules, demographic change, inequality
    JEL: E43 E62 H63 H68 J11
    Date: 2022–02
  6. By: Alexander Leodolter; Savina Princen; Aleksander Rutkowski
    Abstract: A well-designed recurrent tax on residential property (RRPT) can be an important element of the tax mix being able to foster growth, address policy issues related to inequality and contribute to the green transition. Nevertheless, tax revenues from recurrent property taxes are low in EU Member States. The paper first examines the design of efficient property taxation, which also includes removing the homeownership bias in taxation. Subsequently, it provides an overview of RRPT policies in EU Member States and discusses the political economy of property tax reforms. Finally, potential RRPT reforms to reduce inequality and support environmental goals are explored. An RRPT with a progressive rate schedule and a regularly updated tax base factoring in the energy performance of the building is able to support growth, reduce income inequality and contribute to a sustainable environment.
    JEL: D1 D3 D31 H2 H21 H22 H22 H24
    Date: 2022–01
  7. By: Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (LUISS University); Peruzzi, Valentina (Sapienza University of Rome)
    Abstract: We investigate whether globally active firms are more likely to be credit constrained by banks during a financial crisis. Using data on 15,000 businesses from seven European countries, we find that firms with a stable involvement in global value chains were 25% less likely to be rationed by banks during the 2009 financial crisis. This contrasts with the stronger likelihood of credit rationing of firms engaging in plain vanilla export activities. Matching the firm-level information with bank-level data, we obtain that banks insulated global chain participants from the credit crunch, not only accounting for the beneficial effects of global supply chain participation, but also to minimize negative spillovers on their own activities abroad.
    Keywords: Banks; global value chains; firm export; financial crises
    JEL: D22 F10 G20
    Date: 2022–02–28
  8. By: Müller, Henrik; Schmidt, Tobias; Rieger, Jonas; Hufnagel, Lena Marie; Hornig, Nico
    Abstract: In this paper, we present a new indicator to measure the media coverage of inflation. Our Inflation Perception Indicator (IPI) for Germany is based on a corpus of three million articles published by broadsheet newspapers between January 2001 and February 2022. It is designed to detect thematic trends, thereby providing new insights into the dynamics of inflation perception over time. These results may prove particularly valuable at the current juncture, where massive uncertainty prevails due to geopolitical conflicts and the pandemic-related supply-chain jitters. Economists inspired by Shiller (2017; 2020) have called for analyses of economic narratives to complement econometric analyses. The IPI operationalizes such an approach by isolating inflation narratives circulating in the media. Methodically, the IPI makes use of RollingLDA (Rieger et al. 2021), a dynamic topic modeling approach refining the rather static original LDA (Blei et al. 2003) to allow for changes in the model's structure over time. By modeling the process of collective memory, where experiences of the past are partly overwritten and altered by new ones and partly sink into oblivion, RollingLDA is a potent tool to capture the evolution of economic narratives as social phenomena. In addition, it is suitable to produce stable time-series, to the effect that the IPI can be updated frequently. Our initial results show a narrative landscape in turmoil. Never in the past two decades has there been such a broad shift in inflation perception, and therefore, possibly, in inflation expectations. Also, second-round effects, such as significant wage demands, that have not played a major role in Germany for a long time, seem to be in the making. Towards the end of the time horizon, raw material prices are high on the agenda, too, triggered by the Russian war against Ukraine and the ensuing sanctions against the aggressor. We would like to encourage researchers to use our data and are happy to share it on request.
    Keywords: Inflation,Expectations,Narratives,Latent Dirichlet Allocation,Covid-19,Text Mining,Computational Methods,Behavioral Economics
    Date: 2022
  9. By: Qingyang Lin (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: Switzerland implemented an immigration quota system to manage the inflow of immigration between 1970 and 2002. This paper adopts a difference-in-difference strategy taking advantage of subnational variations in the implementation of the quota system to evaluate this migration policy. An instrument variable of antiimmigration attitudes is used to address the potential endogeneity issue. The author finds that the immigration quota system slowed down the growth of foreign population in Switzerland, but had no impact on unemployment. Moreover, such immigration restriction lowered the average skill level of the Swiss population which in turn hurt the productivity of the Swiss economy.
    Keywords: Migration; Anti-Immigration Attitudes; Unemployment; Labor Skills
    JEL: F22 J21 J24 J61 K37
    Date: 2022–03–28
  10. By: Iacono, Roberto; Palagi, Elisa
    Abstract: By exploiting large-scale administrative data on estimated gross and net personal wealth in Norway from 2010 to 2018, this paper establishes the first microlevel analysis of the difference between the real return on wealth and the real growth rate of total pretax income across the entire net wealth distribution. We show that for the top 40% of the distribution, aggregate R − G underestimates its micro counterpart r − g, while the opposite happens for the bottom 60%, indicating that micro r−g qualifies as a more precise measure to analyze the dynamics of income and wealth inequality thoroughly.
    Keywords: wealth inequality; tax records; Norway
    JEL: D30 D31 D33
    Date: 2022–03
  11. By: Menyhert, Balint (European Commission)
    Abstract: This paper explores the feasibility of calculating absolute poverty lines on the basis of minimum food expenditures in developed countries. It makes three important contributions. First, it demonstrates that standard statistical methods used in the developing world deliver inadequate poverty estimates in rich countries characterised by a relatively low food expenditure share. Second, it proposes a new simulation-based inverse method that focuses on the non-food Engel curve and uses available food reference budgets not as inputs but as targeted reference points for the calculations. Finally, an empirical application of the new method using household budget survey data from Italy shows that resulting poverty estimates are in line with the official figures of the Italian Statistical Office in terms of both the poverty rate and the poverty profiles. The proposed method is therefore well suited to produce robust and consistent absolute poverty measures in a large number of developed countries.
    Keywords: absolute poverty measurement, household expenditures, statistical modeling
    JEL: C10 C63 D12 E20 G50 I32
    Date: 2022–02
  12. By: Radek Šauer
    Abstract: This documentation concisely describes the dynamic stochastic general-equilibrium model that the ifo Institute currently uses for simulations and business-cycle analysis. The model consists of three countries and contains a wide range of rigidities. The model is regularly estimated by quarterly macroeconomic data.
    Keywords: DSGE, simulations, forecasting, business-cycle analysis
    JEL: E17
    Date: 2022

This nep-eec issue is ©2022 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.