nep-eec New Economics Papers
on European Economics
Issue of 2022‒04‒18
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. You can't always get what you want (where you want it): Cross-border effects of the US money market fund reform By Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
  2. Wages, compositional effects and the business cycle By Christodoulopoulou, Styliani; Kouvavas, Omiros
  3. Workplace Skills as Regional Capabilities: Relatedness, Complexity and Industrial Diversification of Regions By Duygu Buyukyazici; Leonardo Mazzoni; Massimo Riccaboni; Francesco Serti
  4. Monetary compensation schemes during the COVID-19 pandemic: Implications for household incomes, liquidity constraints and consumption across the EU By Michael Christl; Silvia De Poli; Francesco Figari; Tine Hufkens; Chrysa Leventi; Andrea Papini; Alberto Tumino
  5. When domestic and foreign QE overlap: evidence from Sweden By Di Casola, Paola; Stockhammar, Pär
  6. Monetary policy, macroprudential policy and financial stability By Laeven, Luc; Maddaloni, Angela; Mendicino, Caterina
  7. Labour market skills, endogenous productivity and business cycles By Abbritti, Mirko; Consolo, Agostino
  8. Money markets and bank lending: evidence from the adoption of tiering By Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Giannetti, Mariassunta; Schumacher, Julian
  9. INTAXMOD – Inheritance and Gift Taxation in the Context of Ageing By Alexander Krenek; Margit Schratzenstaller; Klaus Grünberger; Andreas Thiemann
  10. Euro Area banks' sensitivity to changes in carbon price By Belloni, Marco; Kuik, Friderike; Mingarelli, Luca
  11. A study on the EBA stress test results: influence of bank, portfolio, and country-level characteristics By Hernández, Javier; Población García, Francisco Javier; Suárez, Nuria; Tarancón, Javier
  12. The impact of financial transaction taxes on stock markets: Short-run effects, long-run effects, and reallocation of trading activity By Eichfelder, Sebastian; Noack, Mona; Noth, Felix
  13. The Anatomy of the Global Saving Glut By Luis Bauluz; Filip Novokmet; Moritz Schularick
  14. Effects of interest rates on functional income distribution, capacity utilization, capital accumulation and profit rates in France: A post-Kaleckian econometric analysis By Kurt, Ozan Ekin

  1. By: Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
    Abstract: This paper documents significant cross-border effects of the 2014 US money market fund (MMF) reform on MMFs in the euro area. As US-based prime MMFs became less money-like due to the reform, euro area-based prime MMFs received large inflows from foreign investors. These cross-border flows were largely motivated by the search for stable net asset value instruments rather than by the introduction of gates and fees. Consistent with an easing of competitive pressure, institutional prime funds in the euro area reduced their risk-taking. However, the industry became more concentrated overall and more exposed to run risk from foreign investors. This risk materialized during the COVID-19-induced stress period.
    Keywords: cross-border effects,regulation,money market funds,risk-taking
    JEL: E41 G23 G28
    Date: 2022
  2. By: Christodoulopoulou, Styliani; Kouvavas, Omiros
    Abstract: During the Great Recession, unemployment increased substantially across several euro area countries, with wages exhibiting a muted response. As low skilled workers lose their jobs first during a recession, the remaining employed workers result in a relatively more skilled employment pool. This change in the composition of the employed workers inflates the aggregate wage mechanically, even in the case of no actual pay rises. This paper uses individual level data to control for the effect of changes in the composition of workers on wages and wage cyclicality. We find that compositional effects are highly correlated with the severity of the business cycle, being significant in countries where employment losses were larger. Thus, the results partially explain the muted response of the observed wages to the business cycle, as wages decreased more than what the aggregate numbers suggest during the downturn, a picture that is reversed somewhat during the recent recovery. JEL Classification: J30, E32
    Keywords: Compositional effects, Wage cyclicality, Wages
    Date: 2022–03
  3. By: Duygu Buyukyazici; Leonardo Mazzoni; Massimo Riccaboni; Francesco Serti
    Abstract: We quantify the general equilibrium effects on economic growth of improving the quality of institutions at the regional level in the context of the implementation of the European Cohesion Policy for the European Union and the UK. The direct impact of changes in the quality of government is integrated in a general equilibrium model to analyse the system-wide economic effects resulting from additional endogenous mechanisms and feedback effects. The results reveal a significant direct effect as well as considerable system-wide benefits from improved government quality on economic growth. A small 5% increase in government quality across European Union regions increases the impact of Cohesion investment by up to 7% in the short run and 3% in the long run. The exact magnitude of the gains depends on various local factors, including the initial endowments of public capital, the level of government quality, and the degree of persistence over time. inked to higher mortality. Accounting for a host of potential confounders, we find robust support that regions with lower levels of both social and political trust are associated with higher excess mortality, along with citizen polarization in institutional trust in some models. On the ideological make-up regional parliaments, we find that, ceteris paribus, those that lean more ‘tan’ on the ‘gal-tan’ spectrum yielded higher excess mortality. Moreover, although we find limited evidence of elite polarization driving excess deaths on the left-right or gal-tan spectrums, partisan differences on the attitudes towards the EU demonstrated significantly higher deaths, which we argue proxies for (anti)populism. Overall, we find that both lower citizen-level trust and populist elite-level ideological characteristics of regional parliaments are associated with higher excess mortality in European regions during the first wave of the pandemic.
    Keywords: Skill relatedness; Economic complexity; Industrial specialisation; Regional capabilities; Regional diversification.
    JEL: J24 O18 R10 R23
    Date: 2022–04
  4. By: Michael Christl (European Commission - JRC); Silvia De Poli (European Commission – JRC); Francesco Figari; Tine Hufkens; Chrysa Leventi; Andrea Papini (European Commission - JRC); Alberto Tumino (European Commission - JRC)
    Abstract: This paper analyses the effect of the COVID-19 pandemic on household disposable income and household demand in the European Union (EU), making use of the EU microsimulation model EUROMOD and nowcasting techniques. We show evidence of heterogeneity in the impact of the COVID-19 pandemic on the labour markets in EU Member States, with some countries hit substantially harder than others. Most EU Member States experience a large drop in market incomes in 2020, with poorer households hit the hardest. Tax-benefit systems cushioned significantly the transmission of the shock to the disposable income and the household demand, with monetary compensation schemes playing a major role. Additionally, we show that monetary compensation schemes prevent a significant share of households from becoming liquidity constrained during the pandemic.
    Keywords: COVID-19, Inequality, Microsimulation, EUROMOD
    JEL: D31 E24 H24
    Date: 2022–03
  5. By: Di Casola, Paola (Monetary Policy Department, Central Bank of Sweden); Stockhammar, Pär (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We estimate the effects of domestic and foreign quantitative easing (QE) programmes on a small open economy, Sweden, using a structural BVAR model. Domestic QE raised GDP, lowered unemployment and depreciated the currency, while effects on inflation are less clear. The ECB QE had large positive effects on both GDP and inflation in Sweden, also due to the endogenous response of domestic QE to the foreign one. In terms of transmission channels, domestic QE improved lending conditions for households and lowered expected future rates, while foreign QE improved financing conditions for firms.
    Keywords: Quantitative Easing; international spillovers; transmission channels; small open economy; Bayesian VAR models
    JEL: E44 E52 F41 G15
    Date: 2021–05–01
  6. By: Laeven, Luc; Maddaloni, Angela; Mendicino, Caterina
    Abstract: Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions. Monetary policy measures are key to support the supply of credit to the economy, but they could also have unintended consequences on financial stability risks. Macroprudential policies are instead effective in limiting financial stability risks, but they could also reduce the length of economic expansions by preventing credit from flowing to productive economic activities. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies. JEL Classification: E3, E44, G01, G21
    Keywords: financial frictions, policy trade-offs, risk taking, systemic risk
    Date: 2022–02
  7. By: Abbritti, Mirko; Consolo, Agostino
    Abstract: This paper analyses how labour market heterogeneity affects unemployment, productivity and business cycle dynamics that are relevant for monetary policy. The model matches remarkably well the short and long run dynamics of skilled and unskilled workers. Skill mismatch and skill-specific labour market institutions have three main effects on business cycles and growth dynamics. First, as the composition of labour market skills leads to supply segmentation, the relative scarcity of skilled workers increases the natural rate of unemployment and reduces total factor productivity with long-run effects on the growth rate of output. Second, skill heterogeneity in the labour market generates asymmetric outcomes and measures of employment, wages and consumption inequality. Finally, the model provides important insights for the Phillips and Beveridge curves. Skill-specific labour market heterogeneity leads to a flattening of the Phillips curve as wages and unemployment are affected differently across skill types. Also, the model generates sideward shifts of the Beveridge curve following business cycle shocks that are related to the degree of skill heterogeneity. JEL Classification: E24, E3, E5, O41, J64
    Keywords: Beveridge curve, consumption inequality, endogenous growth, labour market, monetary policy, Phillips curve, skill heterogeneity, unemployment fluctuations
    Date: 2022–02
  8. By: Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Giannetti, Mariassunta; Schumacher, Julian
    Abstract: Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of access to the money market for bank lending. We show that the two-tier system produced positive wealth effects for banks with excess reserves and encouraged a reallocation of liquidity toward banks with unused exemptions. This ultimately decreased the fragmentation in the money market and enhanced the monetary policy transmission mechanism. The increased access to money market by banks with unused allowances incentivizes them to extend more credit than other banks, including banks with excess liquidity whose valuations increase the most. JEL Classification: G2, E5
    Keywords: bank lending, Money market, negative interest rate policy
    Date: 2022–02
  9. By: Alexander Krenek (WIFO); Margit Schratzenstaller; Klaus Grünberger (Austrian Institute of Economic Research); Andreas Thiemann
    Abstract: Based on the most recent data from the ECB's Household Finance and Consumption Survey, the project models the future household-level wealth distribution in five selected EU member countries (Finland, France, Germany, Ireland, and Italy) to derive inheritances based on different demographic and wealth projection scenarios. On this basis, various inheritance tax scenarios are simulated to estimate potential inheritance tax revenues for a projection period of 30 years. Our results indicate that multiple factors coincide in favouring a growing revenue potential for inheritance taxation in the medium-term. Wealth accumulation and appreciation lead to higher average wealth levels. The shift of the baby boomer generation out of the labour force results in an increase of the older population both in absolute and relative terms. Eventually, this will lead to a rise in the number of deaths and the number of inheritances. Additionally, low fertility rates lead to a reduction of the average number of successors and thereby decrease the importance of exemption thresholds, as individual inheritances become larger. Overall, our simulations show that the future revenue potential of inheritance taxes may be substantial. In practice, it can be expected that the theoretical revenue potential demonstrated by our simulations will be reduced by tax avoidance, real responses, and general equilibrium effects on other taxes. A review of the empirical evidence shows that behavioural responses to inheritance taxes are less pronounced compared to a net wealth tax.
    Keywords: TP_Europa, inheritance taxation, wealth taxation, ageing, HFCS, behavioural effects
    Date: 2022–04–07
  10. By: Belloni, Marco; Kuik, Friderike; Mingarelli, Luca
    Abstract: In recent years there has been growing attention on the risks posed by climate change. One relevant question for financial stability is to which extent the materialisation of transition risks emerging from the sudden implementation of climate change mitigation policies would impact the financial system. In this paper we analyze the effects of changes in carbon price on the European banking system. We assess this climate change transition risk through a banking sector contagion model where firms are negatively impacted by an increase in carbon prices. Using a unique granular dataset we evaluate the consequences of a combination of different increases in carbon prices and firm emission reduction strategies. We find that taking early policy action, implying more gradual changes in carbon prices, is not expected to lead to adverse impacts on the banking system, especially if firms reduce their emissions efficiently. Conversely, a disorderly, abrupt transition to a low carbon economy requiring very high sudden changes in carbon prices might have disruptive effects on the financial system, especially if firms fail to reduce their emissions. JEL Classification: Q48, Q54, Q58
    Keywords: climate change, empirical banking, financial networks, transition risk
    Date: 2022–03
  11. By: Hernández, Javier; Población García, Francisco Javier; Suárez, Nuria; Tarancón, Javier
    Abstract: The purpose of this paper is to investigate the main drivers of the change in the credit risk provisions at a portfolio level for the banks that have been subject of the 2018 EBA stress tests. Therefore, we perform a holistic review of the drivers of the three-year projections of credit losses. First, we define a model containing all the macroeconomic variables considered by the EBA methodological approach. By adding a three-dimension set of explanatory variables, entity-, banking sector- and portfolio-level aspects, we verify whether the published results show some kind of relation with these explanatory variables. Our results show that, although EBA variables explain most part of credit risk provisions, we obtain evidence about the role played by bank-level variables, banking sector features in each country, and the specific characteristics of the portfolio in explaining part of the provisions. Moreover, the results also indicate the existence of complementary/substitution effects of both bank- and portfolio-level variables with the characteristics of the banking sector when explaining credit risk provisions. JEL Classification: G20, G21, G28
    Keywords: bank characteristics, credit risk, EBA, stress tests
    Date: 2022–02
  12. By: Eichfelder, Sebastian; Noack, Mona; Noth, Felix
    Abstract: We investigate the impact of the French 2012 financial transaction tax on trading activity, volatility, and price efficiency measured by first-order autocorrelation. We extend empirical research by analysing anticipation and reallocation effects. In addition, we consider measures for long-run volatility and first-order autocorrelation that have not been explored yet. We find robust evidence for anticipation effects before the effective date of the French FTT. Controlling for short-run effects, we only find weak evidence for a long-run reduction of trading activity due to the French FTT. Thus, the main impact of the French FTT on trading activity is short-run. We find stronger reactions of low-liquidity treated stocks and a reallocation of trading activity to high-liquidity stocks participating in the Supplemental Liquidity Provider Programme, which is both in line with liquidity clientele effects. Finally, we find weak evidence for a persistent volatility reduction but no indication for a significant FTT impact on price efficiency measured by first-order autocorrelation.
    Keywords: anticipation effect,financial transaction tax,long-run treatment effect,market quality,short-run treatment effect
    JEL: G02 G12 H24 M4
    Date: 2022
  13. By: Luis Bauluz (University of Bonn, World Inequality Lab); Filip Novokmet (University of Bonn, World Inequality Lab); Moritz Schularick (Sciences Po, University of Bonn, CEPR)
    Abstract: This paper provides a household-level perspective on the rise of global saving and wealth since the 1980s. We calculate asset-specific saving flows and capital gains across the wealth distribution for the G3 economies – the U.S., Europe, and China. In the past four decades, global saving inequality has risen sharply. The share of household saving flows coming from the richest 10% of household increased by 60% while saving of middle class households has fallen sharply. The most important source for the surge in top-10% saving was the secular rise of global corporate saving whose ultimate owners the rich households are. Housing capital gains have supported wealth growth for middle-class households despite falling saving and rising debt. Without meaningful capital gains in risky assets, the wealth share of the bottom half of the population declined substantially in most G3 economies.
    Keywords: Income and wealth inequality, household portfolios, historical micro data
    JEL: D31 E21 E44 N32
    Date: 2022–04
  14. By: Kurt, Ozan Ekin
    Abstract: The aim of this empirical study is to examine the effects of interest rates on rates of capacity utilization, accumulation and profit in France within the framework of a post-Kaleckian monetary model. The model adopted in the analysis was developed by Hein & Schoder (2011) and is based on endogenous money supply and exogenous interest. The real long-term interest rate shapes the functional distribution of income and, at a given debt-capital ratio, it both directly and indirectly influences the equilibrium rates of capacity utilization, accumulation and profit. We estimated the model using SUR (Seemingly Unrelated Equations) method for the period 1993-2019. Our findings indicate that an increase in the real long-term interest rate has a negative impact on the equilibrium rates of capacity utilization, capital accumulation and profit rates in the French economy. This result implies that this economy is characterized by a “normal regime”, which is in line with the findings of previous research on the US and Germany. Different econometric specifications of the model equations enforce the robustness of our findings that point that an increase in the real long-term interest rate has a considerable negative effect on the equilibrium rate of capacity utilization, while the effects on capital accumulation and profit are relatively low but still negative.
    Keywords: interest rates,monetary policy,functional income distribution,capacity utilization,capital accumulation,profit rates,post-Keynesian economics
    JEL: E12 E21 E22 E25 E43
    Date: 2022

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