nep-eec New Economics Papers
on European Economics
Issue of 2022‒06‒27
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. One scheme fits all: a central fiscal capacity for the EMU targeting eurozone, national and regional shocks By Beetsma, Roel; Cimadomo, Jacopo; van Spronsen, Josha
  2. The Augmented Bank Balance-Sheet Channel of Monetary Policy By Carla Soares; Diana Bonfim; Christian Bittner; Florian Heider; Glenn Schepens; Farzad Saidi
  3. Sources and Channels of Nonlinearities and Instabilities of the Phillips Curve: Results for the Euro Area and Its Member States By Reichold, Karsten; Wagner, Martin; Damjanović, Milan; Drenkovska, Marija
  4. Expecting Brexit By Dhingra, Swati; Sampson, Thomas
  5. Fiscal Consolidation under Market´s Scrutiny: How Do Fiscal Announcements Affect Bond Yields By Josef Sveda; Jaromir Baxa; Adam Gersl
  6. Business cycle clocks: Time to get circular By António Rua; Nuno Lourenço
  7. What moves markets? By Kerssenfischer, Mark; Schmeling, Maik
  8. The Excess Profits during COVID-19 and Their Tax Revenue Potential By Evgeniya Dubinina; Javier Garcia-Bernardo; Petr Jansky
  9. Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes By Marius Clemens; Werner Röger
  10. Optimal minimum wages By Gabriel M. Ahlfeldt; Duncan Roth; Tobias Seidel
  11. The relevance of banks to the European stock market By Kick, Andreas; Rottmann, Horst
  12. The Macroeconomic Expectations of Firms By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko

  1. By: Beetsma, Roel; Cimadomo, Jacopo; van Spronsen, Josha
    Abstract: This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shocks within a single scheme. Based on NUTS3 regional data over the last two decades and regional fiscal multiplier estimates, our analysis shows that - with a limited risk of moral hazard - substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were on average less severe and therefore needed less stabilisation. JEL Classification: C38, E32, E62, E63
    Keywords: Bayesian inference, Central fiscal capacity, macroeconomic stabilisation, multilevel factor model
    Date: 2022–05
  2. By: Carla Soares; Diana Bonfim; Christian Bittner; Florian Heider; Glenn Schepens; Farzad Saidi
    Abstract: This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards.
    JEL: E44 E52 E58 E63 F45 G20 G21
    Date: 2022
  3. By: Reichold, Karsten (Department of Statistics, TU Dortmund University and Department of Economics, University of Klagenfurt); Wagner, Martin (Department of Economics, University of Klagenfurt, Bank of Slovenia, Ljubljana and Institute for Advanced Studies, Vienna); Damjanović, Milan (Bank of Slovenia, Ljubljana); Drenkovska, Marija (Bank of Slovenia, Ljubljana)
    Abstract: This paper presents evidence for sources and channels of nonlinearities and instabilities of the new Keynesian Phillips curve (NKPC) for the euro area and all but four member states over the last two decades prior to the COVID-19 crisis. The approach rests upon misspecification testing using auxiliary regressions based on the standard open-economy hybrid NKPC. Using a large number of specifications, this approach allows to systematically, i. e., based on a literature review, disentangle the evidence for nonlinearities and instabilities of the NKPC according to sources and channels. For the euro area and most considered member states, there is substantial evidence for nonlinearities and instabilities. The relatively most important channels of nonlinearities and instabilities are similar across countries, whereas the relatively most important sources differ across countries. The results strongly indicate the need for considering nonlinear NKPC relationships in empirical analyses and also point towards potentially useful nonlinear specifications.
    Keywords: Euro area, instability, new Keynesian Phillips curve, nonlinearity, specification analysis
    JEL: E31 E52 E58 F62 J11
    Date: 2022–06
  4. By: Dhingra, Swati; Sampson, Thomas
    Abstract: The Brexit vote precipitated the unravelling of the UK’s membership of the world’s deepest economic integration agreement. This paper reviews evidence on the realized economic effects of Brexit. The 2016 Brexit referendum changed expectations about future UK-EU relations. Studying its consequences provides new insights regarding the economic impacts of news and uncertainty shocks. Voting for Brexit had large negative effects on the UK economy between 2016 and 2019, leading to higher import and consumer prices, lower investment, and slower real wage and GDP growth. However, at the aggregate level, there was little or no trade diversion away from the EU, implying that many of the anticipated long-run effects of Brexit did not materialize before the new UK-EU trade relationship came into force in 2021.
    Keywords: Brexit; UK economy; import prices; consumer prices; ES/V004514/1; ES/V007270/1
    JEL: N0
    Date: 2022–01–25
  5. By: Josef Sveda (Institute of Economic Studies, Faculty of Social Sciences, Charles University & The Czech National Bank, Prague, Czech Republic); Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University & The Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czech Republic); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We estimate the short-run reactions of bond spreads of selected EU member states vis-a-vis the German bund on fiscal announcements from January 2000 till December 2019. To avoid selection bias, the announcements are scrapped from the Factiva database, and then, depending on their tone, they are classified as hawkish or dovish. We show that announcements of fiscal consolidation decrease the spreads - however, the full-sample result masks substantial time and country variation. The impact of fiscal consolidation is statistically significant, namely in the post-crisis period since the Draghi´s "whatever it takes" speech, but not before the Great Recession or during the European Debt Crisis.
    Keywords: fiscal announcements, bond spreads, EU debt crisis, fiscal consolidation
    JEL: E62 G01 G12
    Date: 2022–06
  6. By: António Rua; Nuno Lourenço
    Abstract: Assessing the momentum of the business cycle is of utmost importance for policymakers and private agents. In this respect, the use of business cycle clocks has gained prominence among national and international institutions to depict the current stage of the business cycle. Drawing on circular statistics, we propose a novel approach to business cycle clocks in a datarich environment. The method is applied to the main euro area countries resorting to a large dataset covering the last three decades. We document the usefulness of the circular business cycle clock to capture the business cycle stage, including peaks and troughs, with the findings being supported by the cross-country evidence.
    JEL: C30 C55 E32
    Date: 2022
  7. By: Kerssenfischer, Mark; Schmeling, Maik
    Abstract: What share of asset price movements is driven by news? We build a large, time-stamped event database covering scheduled macro news as well as unscheduled events. We find that news account for about 50% of all bond and stock price movements in the United States and euro area since 2002, suggesting that a much larger share of return variation can be traced back to observable news than previously thought. Moreover, we provide stylized facts about the type of news that matter most for asset prices, the persistence of news effects, and spillover effects between the US and euro area.
    Keywords: Macro news,Asset prices,High-Frequency Identification,Event Database
    JEL: E43 E44 G12 G14
    Date: 2022
  8. By: Evgeniya Dubinina (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Javier Garcia-Bernardo (Department of Methodology and Statistics, Utrecht University, Utrecht, Netherlands); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The COVID-19 pandemic has affected most companies´ profits negatively, but other companies did exceptionally well, recording excess profits during the pandemic. In this paper we estimate the scale of these excess profits, their determinants, and the revenue potential of excess profits tax. To estimate excess profits, we develop a trend-adjusted average earnings methodology. We apply the methodology to the consolidated Orbis data to estimate that large multinational corporations (MNCs) with subsidiaries in the EU made excess profits of $447 billion in 2020 (41.7% of their total profits in 2020). We show that primary business activities is a key determinant of MNCs´ excess profits made during the COVID-19 pandemic. We show that manufacturing, information, and financial sectors are responsible for the majority of excess profits. With country-by-country reporting data we estimate the excess profits arising from each EU member state and find that EU member states could together raise $6 billion with an excess profits tax of 10%, an additional tax levied by governments on corporations’ excess profits. The research findings may be useful for policymakers in addressing the question of financing economic recovery from the COVID-19 pandemic.
    Keywords: excess profits; covid-19; multinational corporations; excess profits tax; european union
    JEL: H25 L11 L25
    Date: 2022–06
  9. By: Marius Clemens; Werner Röger
    Abstract: This paper revives the question of whether a temporary VAT change is an adequate instrument for crisis stabilization. In empirical assessments, we find that durable goods consumption fluctuates strongly over the business cycle and that VAT rate changes affect durable goods in particular. Therefore, we build a dynamic stochastic general equilibrium (DSGE) model that is capable of addressing this major channel through which temporary VAT changes affect the economy. Furthermore, we allow for an imperfect pass-through of VAT measures to consumer prices via VAT-specific price adjustment costs. We compare the general VAT policy in the crisis with alternative stabilization policies, such as interest rate cuts, spending policies and a VAT cut only for durable goods. First, we find that considering durable goods in the model generates sizeable stabilization effects of VAT changes on consumption over a broad set of parameter ranges. Second, we find that the VAT policy can mimic monetary policy with minor exceptions. Third, the VAT rate cut has the highest short-term multiplier compared with government spending policies, but not in the medium-term. Fourth, a VAT rate reduction only on durable goods will generate strong GDP effects and even be self-financing in the first year. In contrast, a VAT reduction only on non-durables has small effects on GDP and is not self-financing. In view of our results, we conclude that a temporary VAT cut, when applied to durable goods, is an effective stabilization instrument.
    Keywords: Value added tax, durable consumption, multiplier, business cycle, zero lower bound
    JEL: E62 E63 H21
    Date: 2022
  10. By: Gabriel M. Ahlfeldt; Duncan Roth; Tobias Seidel
    Abstract: We develop a quantitative spatial model with heterogeneous firms and a monopsonistic labour market to derive minimum wages that maximize employment or welfare. Quantifying the model for German micro regions, we find that the German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%. The welfare-maximizing federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%. An employment-maximizing regional wage, set at 50% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%.
    Keywords: general equilibrium, minimum wage, monopsony, employment, Germany, inequality
    Date: 2022–12
  11. By: Kick, Andreas; Rottmann, Horst
    Abstract: Banks have always played an ambivalent role in financial markets. On the one hand, they provide essential services for the market; on the other hand, problems in the banking sector can send shock waves through the entire economy. Given this prominent role, it is not surprising that Pereira and Rua (2018) found that the health of the banking sector exerts an influence on stock returns in the US. Understanding the relationship between banks and their impact on the asset prices of non-financials is essential to evaluate the risk emanating from an unhealthy banking sector and should be considered in new regulatory requirements. The aim of this study is to determine if the health of European banks is of such importance for the European stock market so that spillover effects are visible. Our results show that none of our banking-health variables have explanatory power on the cross-section of European stock returns. These findings contrast those for the US. The reasons may be manifold, from an unimportant liquidity provisioning channel over reduced room for actions due to regulatory requirements up to a moral hazard situation in Europe, where investors strongly rely on the governmental bailouts of distressed banks.
    Keywords: asset pricing,banking,spillover,errors-in-variables,individual stocks,distance-to-default
    JEL: G12 G21
    Date: 2022
  12. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: Using surveys of firms around the world, we review existing evidence on how firms form their macroeconomic expectations. Several facts stand out. First, the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Second, disagreement about inflation among firms is large. Third, firms often change their short-run and long-run inflation expectations jointly and by similar amounts. Fourth, firms in economies with a history of low and stable inflation are inattentive to inflation and monetary policy, but this is less true in countries with more volatile environments. Fifth, firms form expectations about inflation and the real economy jointly, but the way in which they do can differ widely across countries. Finally, we show that conditioning on firms’ inflation expectations generates a stable Phillips curve relationship. We also review evidence showing that exogenous variation in the macroeconomic expectations of firms affects their decisions.
    JEL: E03 E30 E40 E5
    Date: 2022–05

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