nep-eec New Economics Papers
on European Economics
Issue of 2022‒05‒16
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Coherence of Output Gaps in the Euro Area: The Impact of the Covid-19 Shock By Jakob de Haan; Jan P.A.M. Jacobs; Renske Zijm
  2. Twin Deficits through the Looking Glass: Time-Varying Analysis in the Euro Area By António Afonso; José Carlos Coelho
  3. European Exchange Rate Adjustments in Response to COVID-19, Containment Measures and Stabilization Policies By Jens Klose
  4. Can unconventional monetary policy contribute to climate action? By Alice Eliet-Doillet; Andrea Maino
  5. The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions By Mario Di Serio; Matteo Fragetta; Emanuel Gasteiger; Giovanni Melina
  6. Fiscal Sustainability, Fiscal Reactions, Pitfalls and Determinants By António Afonso; José Carlos Coelho
  7. The Effect of Brexit on British Workers Living in the EU By Ana Venâncio; João Pereira dos Santos
  8. Assessing the Effects of Borrower-Based Macroprudential Policy on Credit in the EU Using Intensity-Based Indices By Lara Coulier; Selien De Schryder
  9. Forecasting Inflation with a Zero Lower Bound or Negative Interest Rates: Evidence from Point and Density Forecasts By Christina Anderl; Guglielmo Maria Caporale
  10. The rule of law and investment in intangible capital: Evidence for the EU-16, 1996-2017 By Roth, Felix
  11. Labour Market Concentration, Wages and Job Security in Europe By Bassanini, Andrea; Bovini, Giulia; Caroli, Eve; Ferrando, Jorge Casanova; Cingano, Federico; Falco, Paolo; Felgueroso, Florentino; Jansen, Marcel; Martins, Pedro S.; Melo, António; Oberfichtner, Michael; Popp, Martin
  12. European investment Bank loan appraisal, the EU climate bank ? By Ebeling Antoine
  13. Assessing Debt Stationarity and Sustainability in the Longer Run with Fourier DF Unit Root Tests and Time-Varying Fiscal Reaction Functions. By Jamel Saadaoui; Marco Chi Keung Lau; Yifei Cai
  14. Concentration and Competition: Evidence from Europe and Implications for Policy By Gábor Koltay; Szabolcs Lorncz; Tommaso M. Valletti
  15. The Heterogeneous Effect of Uncertainty on Firms Trade Margins Destruction and Diversion By Mustapha Douch; Jun Du; Enrico Vanino
  16. What Drives Mortgage Default Risk in Europe and the U.S.? By Mr. Thierry Tressel; Eugen Tereanu; Mr. Marco Gross; Xiaodan Ding
  17. The (Non-)Neutrality of Value-Added Taxation By Georg Schneider; Frank Stähler; Georg U. Thunecke
  18. The UK Productivity “Puzzle” in an International Comparative Perspective By John G. Fernald; Robert Inklaar
  19. What should the inflation target be? Views from 600 economists By Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim

  1. By: Jakob de Haan; Jan P.A.M. Jacobs; Renske Zijm
    Abstract: Using the measures proposed by Mink et al. (2012), we reexamine the coherence of business cycles in the euro area using a long sample period. We also analyze the impact of the COVID-19 pandemic on business cycle coherence and examine whether our measures for business cycle coherence indicate a core versus periphery within EMU. Our results suggest that business cycle coherence did not increase monotonically. The COVID-19 pandemic made that the signs of the output gaps of euro area countries became more similar, but we find large differences in the amplitude of the output gaps across countries.
    Keywords: Covid-19 crisis, business cycle coherence, synchronization, output gaps, euro area
    JEL: E32 F02 F42
    Date: 2022
  2. 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
  3. By: Jens Klose (THM Business School Giessen)
    Abstract: This paper estimates the effects of nine exchange rates for european countries vis-a-vis the Euro in the COVID pandemic. Using data on COVID cases, three containment and two stabilization measures relative to the euro area counterparts, it is shown that a more severe spread of the virus leads to a depreciation of the domestic currency. The same holds with respect to stricter movement restrictions, health care measures and more supportive monetary policies. More expansionary fiscal policies by the domestic country on the other hand lead to an appreciation of the currency. Two extensions show that the results differ with respect to whether the country is a scandinavian or eastern european country and whether the euro area countries or the other european countries introduce the measures.
    Keywords: Exchange rates, COVID-19, Europe, stabilization policies, containment measures, panel VAR
    JEL: E44 E52 E62
    Date: 2022
  4. By: Alice Eliet-Doillet (Ecole Polytechnique Fédérale de Lausanne); Andrea Maino (University of Geneva)
    Abstract: This paper investigates the impact of central banks when supporting policies aiming at greening the financial system. The July 2021 Monetary Policy Strategy Review of the European Central Bank unexpectedly dedicated a whole workstream to climate change. The announcement had a significant effect on the pricing and issuance of green bonds in the Eurozone. We find that ECB eligible green bonds’ Yield-to-Maturity decreased following the announcement when compared to equivalent conventional bonds. Firms incorporated in the Eurozone reacted to the announcement by increasing the amount of green bond issued, for both the segments of ECB-eligible and non-ECB-eligible green bonds.
    Keywords: Climate Change, Central Banks, Green Bonds, Carbon Emissions, Quantitative Easing, Monetary Policy, ESG
    JEL: Q58 E52 E58 G12
    Date: 2022–04
  5. By: Mario Di Serio; Matteo Fragetta; Emanuel Gasteiger; Giovanni Melina
    Abstract: We estimate government spending multipliers in demand- and supply-driven recessions for the Euro Area. Multipliers in a moderately demand-driven recession are 2-3 times larger than in a moderately supply-driven recession, with the difference between multipliers being non-zero with very high probability. More generally, multipliers are inversely correlated with the deviation of inflation from its trend, implying that the more demand-driven a recession, the higher the multiplier. Median multipliers range from -0.5 in supply-driven recessions to about 2 in demand-driven recessions. The econometric approach leverages a factor-augmented interacted vector-autoregression model purified of expectations (FAIPVAR-X). The model captures the time-varying state of the business-cycle including strongly and moderately demand- and supply-driven recessions, by taking the whole distribution of inflation deviations from trend into account.
    Keywords: fiscal multiplier, business cycle, interacted panel VAR, factor models, Euro Area
    JEL: C32 C33 C38 E32 E62
    Date: 2022
  6. 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
  7. By: Ana Venâncio; João Pereira dos Santos
    Abstract: The effect of Brexit is an important topic in the European and British political agendas. This study examines the perspective of the EU countries, with regards how British citizens working in an EU country reacted to the end of free movement of workers. Employing synthetic control methods and using data from Portugal, we estimate how the behaviour of UK citizens working in Portugal would have evolved if the Remain vote had won the referendum. Our results suggest that the Brexit referendum reduced the number of UK citizens working in Portugal, particularly in the case of non-university educated, male individuals with temporary employment contracts. This reduction is explained by the decrease in the number of incomers. We also find that those UK citizens who were already working in Portugal before Brexit are less likely to leave the country.
    Keywords: Brexit, employment, migration
    JEL: J10 J61 J68
    Date: 2022
  8. By: Lara Coulier; Selien De Schryder (-)
    Abstract: We construct new data-driven intensity-adjusted indices for a broad set of macroprudential policy announcements in the European Union (EU) that are able to capture the restrictiveness and bindingness of the macroprudential policy actions. The indices are used to assess the effectiveness of borrower-based macroprudential policy in reducing credit in the EU from 1995 to 2019. Our results indicate that these instruments have successfully reduced household, housing, and to a smaller extent consumption credit, especially in the long run. Moreover, we find that standard dummy approaches used to measure macroprudential policy signal different effects of borrower-based policies in our sample and are more sensitive to outliers, resulting in deceptive and incomplete results.
    Keywords: Macroprudential policy, intensity-adjustment, household credit, panel data analysis
    JEL: E58 C23 G18 G28
    Date: 2022–04
  9. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the Wu-Xia (2016) and the Krippner (2015a) ones) and for different lower bound parameters we compare the out-of-sample forecasting performance of an inflation model including a shadow rate interaction term with a benchmark one excluding it. Both specifications are estimated by OLS (Ordinary Least Squares) and includes a range of macroeconomic factors computed by means of principal component analysis. Both point and density forecasts of the inflation rate are evaluated. The models including the shadow rate interaction term are found to outperform the benchmark ones according to both sets of criteria except in countries operating an official inflation targeting regime. The presence or absence of a zero lower bound affects which type of shadow rate produces more accurate inflation forecasts.
    Keywords: shadow interest rates, zero lower bound, inflation forecasting, density forecasts
    JEL: C38 C53 E37 E43 E58
    Date: 2022
  10. By: Roth, Felix
    Abstract: This paper analyses the relationship between the rule of law (RoL) and intangible capital investment by businesses within a sample of 16 European countries, over the period from 1996 to 2017. Studies on the effects of RoL on intangible capital investment are scarce, hence, the relevance of empirical research in this area. When controlling for endogeneity, the study found a coefficient of 2.0 for the relationship between RoL and investment in intangibles, confirming the significant and positive relationship between the two and highlighting RoL as a driving factor of investment in intangibles and, hence, labour productivity growth in the EU-16.
    Keywords: rule of law (RoL),intangible capital investment,labour productivity growth,European Union (EU)
    JEL: E02 E22 O34 O43 O52 P14
    Date: 2022
  11. By: Bassanini, Andrea (OECD); Bovini, Giulia (Bank of Italy); Caroli, Eve (Université Paris-Dauphine); Ferrando, Jorge Casanova (Compass Lexecon); Cingano, Federico (Bank of Italy); Falco, Paolo (University of Copenhagen); Felgueroso, Florentino (FEDEA, Madrid); Jansen, Marcel (Universidad Autónoma de Madrid); Martins, Pedro S. (Nova School of Business and Economics); Melo, António (Université Paris-Dauphine); Oberfichtner, Michael (Institute for Employment Research (IAB), Nuremberg); Popp, Martin (Institute for Employment Research (IAB), Nuremberg)
    Abstract: We investigate the impact of labour market concentration on two dimensions of job quality, namely wages and job security. We leverage rich administrative linked employer-employee data from Denmark, France, Germany, Italy, Portugal and Spain in the 2010s to provide the first comparable cross-country evidence in the literature. Controlling for productivity and local product market concentration, we show that the elasticities of wages with respect to labour market concentration are strikingly similar across countries: increasing labour market concentration by 10% reduces wages by 0.19% in Germany, 0.22% in France, 0.25% in Portugal and 0.29% in Denmark. Regarding job security, we find that an increase in labour market concentration by 10% reduces the probability of being hired on a permanent contract by 0.46% in France, 0.51% in Germany and 2.34% in Portugal. While not affecting this probability in Italy and Spain, labour market concentration significantly reduces the probability of being converted to a permanent contract once hired on a temporary one. Our results suggest that considering only the effect of labour market concentration on wages underestimates its overall impact on job quality and hence the resulting welfare loss for workers.
    Keywords: labour market concentration, monopsony, wages, job security
    JEL: J31 J42 L41
    Date: 2022–04
  12. By: Ebeling Antoine
    Abstract: What are the determining factors in the allocation of European Investment Bank (EIB) green investments? Using data describing more than 17,000 EIB loans to European Union (EU) member states from 1960 to 2020, we first break down EIB loans into green, neutral and brown loans. We then provide evidence that EIB green investments tend to be allocated to the most advanced economies, specifically, that green investment is positively correlated with high GDP per capita and increases with national environmental expenditure. Our findings illustrate the dichotomy between economic development and environmental objectives faced by the EIB.
    Keywords: European investments Bank ; Green investment ; Climate policy.
    JEL: E22 G24 Q56
    Date: 2022
  13. By: Jamel Saadaoui; Marco Chi Keung Lau; Yifei Cai
    Abstract: Thanks to various Fourier DF unit root tests and time-varying fiscal reaction functions, this study examines the stationarity and the sustainability of public finance for six industrial countries over the period spanning from 1870 to 2017. Longer-run debt sustainability is not rejected for the UK, Sweden, and for the US. The evidence is more mixed for Canada, Italy and Portugal.
    Keywords: Fourier DF unit root test, Debt sustainability, Public debt, Primary balance.
    JEL: C22 E62 H62
    Date: 2022
  14. By: Gábor Koltay; Szabolcs Lorncz; Tommaso M. Valletti
    Abstract: The paper provides new evidence on proxy indicators of market power for major European countries. The data shows moderately increasing average industry concentration over the last two decades, a considerably increasing proportion of high concentration industries, and an overall tendency towards oligopolistic structure. Estimates of aggregate profitability also show a sustained increase over the recent decades for European economies. While the academic and policy debate is not settled as to whether the causes of these trends are policy driven or reflect technological improvement, our findings suggest that competition policy is likely to face more challenges as large companies are becoming more common in more and more industries.
    Keywords: mergers, antitrust, European Union, concentrations, industries
    JEL: L10 L40 G34
    Date: 2022
  15. By: Mustapha Douch (University of Edinburgh, Business School, Edinburgh, UK.); Jun Du (Aston Business School and Centre for Business Prosperity (CBP), UK); Enrico Vanino (University of Sheffield, Dept. of Economics, UK)
    Abstract: Uncertainty over future tariff schedules and customs arrangements is a key factor in defying firms’ participation in international markets. This paper investigates firm heterogeneity in the effects of trade policy uncertainty on the margins of trade, exploiting the Brexit process as a quasi-natural experiment and using transaction-level trade data for UK firms. Comparing UK trade flows to the EU and extra-EU countries, and the variations of product-specific tariff threats along firm size, our results show an overall reduction in UK-EU trade flows in respect with extra-EU markets, as uncertainty regarding future trade policies increased during the post-Brexit referendum negotiations. This is the result of two contemporaneous effects: a destruction of trade flows for smaller firms more exposed to uncertainty and potential tariffs, while a consolidation and diversion of trade flows, in particular towards more distant and emerging extra-EU markets, for larger firms. Falsification tests and alternative identification strategies corroborate the robustness of the main findings.
    Keywords: policy uncertainty; trade diversion; trade destruction; trade margins; firm heterogeneity; Brexit
    JEL: F02 F13 F14 F15 F61 F68
  16. By: Mr. Thierry Tressel; Eugen Tereanu; Mr. Marco Gross; Xiaodan Ding
    Abstract: We present an analysis of the sensitivity of household mortgage probabilities of default (PDs) and loss given default (LGDs) on unemployment rates, house price growth, interest rates, and other drivers. A structural micro-macro simulation model is used to that end. It is anchored in the balance sheets and income-expense flow data from about 95,000 households and 230,000 household members from 21 EU countries and the U.S. We present country-specific nonlinear regressions based on the structural model simulation-implied relation between PDs and LGDs and their drivers. These can be used for macro scenario-conditional forecasting, without requiring the conduct of the micro simulation. We also present a policy counterfactual analysis of the responsiveness of mortgage PDs, LGDs, and bank capitalization conditional on adverse scenarios related to the COVID-19 pandemic across all countries. The economics of debt moratoria and guarantees are discussed against the background of the model-based analysis.
    Keywords: Credit risk, household sector, micro-macro simulation modeling, financial policies
    Date: 2022–04–01
  17. By: Georg Schneider; Frank Stähler; Georg U. Thunecke
    Abstract: This paper employs a structural gravity model and novel value-added tax (VAT) regime data to investigate the impact of VAT rate changes on imports and domestic production of final goods. We demonstrate that the VAT is both non-neutral and discriminatory. A one percentage point VAT increase reduces aggregate imports and internal trade by 3.05% and implies a 5.4 to 7.9% reduction of foreign imports relative to internal trade. Based on these results we conduct a counterfactual equilibrium analysis and illustrate that VAT rate changes imply substantial welfare effects for an average country in the European Union.
    Keywords: structural gravity, value-added taxation, neutrality, discrimination
    JEL: F10 F14 H22
    Date: 2022
  18. By: John G. Fernald; Robert Inklaar
    Abstract: The UK’s slow productivity growth since 2007 has been referred to as a “puzzle”, as if it were a particularly UK-specific challenge. In this paper, we highlight how the United States and northern Europe experienced very similar slowdowns. The common slowdown in productivity growth was a slowdown in total factor productivity (TFP) growth; we find little evidence that capital deepening was an important independent factor. From a conditional-convergence perspective, most of the UK slowdown follows from the slowdown at the U.S. frontier. From the mid-1980s to 2007, the UK’s relative productivity level moved closer to the level of the U.S. and northern Europe, driven by essentially complete convergence in market services TFP. In contrast, manufacturing lost ground relative to the U.S. frontier prior to 2007, and remains far below the frontier. The relative ground lost after 2007 is modest—cumulating to about 4 percentage points—and is largely attributable to somewhat unfavorable industry weights and industry-specific issues in mining, rather than a systematic UK competitiveness problem.
    Keywords: productivity growth; Great Recession; convergence
    JEL: D24 E23 E44 F45 O47
    Date: 2022–03–23
  19. By: Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim
    JEL: C38 E31 E52 E58
    Date: 2022–05–09

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