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on European Economics |
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Issue of 2022‒07‒11
eleven papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Giovannini, Alessandro; Ioannou, Demosthenes; Stracca, Livio |
| Abstract: | Well-functioning risk-sharing arrangements are essential for the shock absorbing capacity and resilience of an economy, even more so for countries in a monetary union where the single monetary policy is unable to address asymmetric shocks. The common shocks that euro area member states have been facing over the past years are just that: common. Yet their impacts are far from equal across countries, implying that risk sharing remains an important issue. This paper discusses the different forms and channels of risk sharing and reviews the main arguments in favour and against the development of different forms of public and private risk sharing in the euro area, focusing in particular on whether they act as complements or substitutes. It proposes a stylised theoretical model of a monetary union to test the complementarity or substitutability between public and private risk sharing. While the model calibration finds that substitutability prevails, the model also contains an interesting complementarity whereby a central fiscal capacity makes private risk sharing more efficient, especially in crisis times. Our findings are relevant for the ongoing policy discussion on EMU deepening as the provision of public risk sharing as well as the overall degree of risk sharing are still comparatively low in the euro area. JEL Classification: C23, E62, G11, G15 |
| Keywords: | Economic and Monetary Union, monetary union, Risk sharing |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2022295&r= |
| By: | Pei Kuang (University of Birmingham); Kaushik Mitra (University of Birmingham) |
| Abstract: | The paper develops a business cycle model with policymakers’ learning about potential output to analyze the implications of mis-measuring cyclically-adjusted budget balance (CAB) for fiscal response and the macroeconomy in the European recession after the global financial crisis. The initial recession led to over-pessimism of potential output and structural balance triggering fiscal austerity. The austerity caused further recession, which reinforced potential output and CAB pessimism, requiring continued austerity. Mutual reinforcement between pessimism and austerity contributed to the prolonged recession. The model replicates new evidence on revisions to potential output estimates and the relation between fiscal consolidation and policymakers’ beliefs. |
| Keywords: | Structural fiscal balance, learning, debt brake, pessimism, potential output |
| JEL: | E62 D84 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:22-08&r= |
| By: | Merike Kukk; Alari Paulus; Nicolas Reigl |
| Abstract: | We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated with higher systemic risk. Cumulative estimates with dynamic models show that systemic risk has a persistent negative response to an increase in market concentration from low and median levels of concentration. Local projection estimates for the period preceding the global financial crisis also suggest that an increase in market concentration may have further added to systemic risk at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk and market concentration |
| Keywords: | systemic risk, financial stability, credit institutions, credit growth, market concentration |
| JEL: | G10 G21 E58 C22 C54 |
| Date: | 2022–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2022-4&r= |
| By: | Hancké, Bob; Garcia-Calvo, Angela |
| Abstract: | Is making semiconductors in Europe a good idea? With the introduction of the European Chips Act in early 2022, this is no longer an academic question. In this article we evaluate these plans in light of a wider—but remarkably one-sided—debate on industrial policy in advanced capitalist economies. Instead of focusing on policymakers, as most students of industrial policy have done, we draw attention to two first-order conditions that determine the chances of policy success: the existence of (proto-)competitive incumbents, and the alignment of the policy objectives with the prevailing institutional framework. We rely on that framework to evaluate the successes and failures in European aerospace, German biotech, and French computers, before using these insights to evaluate the European Chips Act. Investing in manufacturing of mature chips is, in that light, not a good idea. We suggest, instead, that the EU should concentrate on market segments that leverage its high-skill workplaces and world-class research system, and in which Europe has either already developed a comparative advantage or will not find itself at an initial disadvantage. |
| Keywords: | Wiley deal |
| JEL: | L81 |
| Date: | 2022–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:115020&r= |
| By: | Antonio Moreno (School of Economics and Business, University of Navarra); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alexia Ventula Veghazy (European Central Bank (ECB)); Alexander F. Wagner (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute) |
| Abstract: | Is there a connection between the 2007-2009 financial crisis and the COVID-19 pandemic? To answer this question, we examine the relation between both macroeconomic and financial losses derived from the financial crisis and the health outcomes associated with the first wave of the pandemic. At the European level, countries more affected by the financial crisis had more deaths relative to coronavirus cases. An analogous relation emerges across Spanish provinces and US states. Part of the transmission from finance to health outcomes appears to have occurred through cross-sectional differences in health facilities. Therefore, dampening financial-economic instability may yield long-term societal benefits. |
| Keywords: | Global Financial Crisis, COVID-19, local sovereign debt, death ratio, curative beds |
| JEL: | I10 G21 H1 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2244&r= |
| By: | Clemens Fuest; Stefan Greil; Felix Hugger; Florian Neumeier |
| Abstract: | This paper uses micro data from country-by-country reporting of more than 3600 large multinational companies operating in 238 jurisdictions to analyze global profit shifting to avoid taxes. These companies report 7% of their global profits in jurisdictions with effective average tax rates below 5%, but only 0.4% of their employees and 3% of their tangible assets are located there. We find that globally, these companies reduce their tax burden by EUR 53 billion (15% of their overall tax payments) by shifting profits to low-tax countries. Losses of the US and Canada are slightly lower, the losses of the EU 27 member states are similar to the global average. 60% of the profit shifting is carried out by the 10% largest multinational companies. We show that taking into account non-linearities in profit shifting and subsidiaries reporting zero profits is of key importance for accurate estimates of profit shifting. We also investigate profit shifting channels and provide evidence suggesting that the location of IP and equity in low tax countries as well as the provision of loans to entities in high tax countries play a key role for tax planning. |
| Keywords: | : corporate taxation, tax avoidance, profit shifting, multinational enterprises, country-by-country reporting |
| JEL: | F23 H25 H26 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9757&r= |
| By: | Pouliakas, Konstantinos; Wruuck, Patricia |
| Abstract: | European firms have increasingly invested in training of employees but differences across countries and types of firms remain - and the COVID-19 shock may have exacerbated them. This report analyses European firms' investment in training over the last six years examining trends, factors supporting training investment as well as the impact of the COVID-19 shock. We base the empirical analysis on a unique dataset, the European Investment Bank's Investment Survey (EIBIS), which allows tracking corporate training investment on a yearly basis. To understand dynamics underpinning firms' decision to invest in their workforce, we examine transition patterns and employ dynamic panel data estimation. Finally, we analyze the impact of the COVID-19 pandemic on firms' investment in workforce training and transitions in and out of training. We find that despite a slow upward trend in training investment observed in recent years, supported by labour market recovery, differences across firms and countries have persisted. The pandemic risks aggravating these, through its asymmetric impact on labour markets and differences in corporate innovation, firm structure and resilience. While firm training can be an important element for firms and their workforce to adjust to the post-pandemic environment, asymmetries in training investment could make it harder for those already lagging. The paper concludes with a discussion of policy implications. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:202207&r= |
| By: | Andreas Benedictow; Roger Hammersland (Statistics Norway) |
| Abstract: | We identify variables that help explain the persistent weakness of the Norwegian krone since 2016 within a fully simultaneous model of the underlying process driving the krone-euro exchange rate. In addition to a set of fundamental variables we consider non-traditional explanatory variables related to an exchange rate premium, inspired by several claims to insights made by market participants. The weak Norwegian krone seems to be largely attributable to factors related to the risk premium, such as the declining importance of petroleum in the Norwegian economy, a relative reduction in FDI in Norway and a fall in oil industry-specic share prices. |
| Keywords: | Exchange rate; Foreign exchange rate premium; Cointegration; VAR-analysis |
| JEL: | C22 C32 F31 F41 G15 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:981&r= |
| By: | Alexander Chudik; M. Hashem Pesaran; Alessandro Rebucci |
| Abstract: | This paper provides estimates of COVID-19 effective reproduction numbers and explains their evolution for selected European countries since the start of the pandemic taking account of changes in voluntary and government mandated social distancing, incentives to comply, vaccination and the emergence of new variants. Evidence based on panel data modeling indicates that the diversity of outcomes that we document may have resulted from the non-linear interaction of mandated and voluntary social distancing and the economic incentives that governments provided to support isolation. The importance of these factors declined over time, with vaccine uptake driving heterogeneity in country experiences in 2021. Our approach, also allows us to identify the basic reproduction number, R0. It is precisely estimated and differ little across countries. |
| Keywords: | COVID-19, multiplication factor, under-reporting, social distancing, self-isolation, SIR model, reproduction number, pandemics, vaccine |
| JEL: | D00 F60 C40 E70 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9754&r= |
| By: | Farmer, J. Doyne; Carro, Adrian; Hinterschweiger, Marc; Uluc, Arzu |
| Abstract: | We develop an agent-based model of the UK housing market to study the impact of macroprudential policy experiments on key housing market indicators. The heterogeneous nature of this model enables us to assess the effects of such experiments on the housing, rental and mortgage markets not only in the aggregate, but also at the level of individual households and sub-segments, such as first-time buyers, homeowners, buy-to-let investors, and renters. This approach can therefore offer a broad picture of the disaggregated effects of financial stability policies. The model is calibrated using a large selection of micro-data, including data from a leading UK real estate online search engine as well as loan-level regulatory data. With a series of comparative statics exercises, we investigate the impact of (i) a hard loan-to-value limit, and (ii) a soft loan-to-income limit, allowing for a limited share of unconstrained new mortgages. We find that, first, these experiments tend to mitigate the house price cycle by reducing credit availability and therefore leverage. Second, an experiment targeting a specific risk measure may also affect other risk metrics, thus necessitating a careful calibration of the policy to achieve a given reduction in risk. Third, experiments targeting the owner-occupier housing market can spill over to the rental sector, as a compositional shift in home ownership from owner-occupiers to buy-to-let investors affects both the supply of and demand for rental properties. |
| Keywords: | Agent-based model, housing market, macroprudential policy, borrower-based measures, buy-to-let sector |
| JEL: | D1 D31 E58 G51 R21 R31 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:amz:wpaper:2022-06&r= |
| By: | Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido |
| Abstract: | Yes, they would. In a randomized control trial, we provide groups of respondents from the Bundesbank Online Panel Households with information about a hypothetical alternative ECB monetary policy regime akin to the Federal Reserve's flexible average inflation targeting (AIT). Inflation expectations significantly increase for the treated individuals. When provided with additional information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. We assess the economic significance of our findings by comparing two model economies under different monetary policy strategies, calibrated to match the difference in medium-term inflation expectations from our survey results. Under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is considerably reduced. |
| Keywords: | Monetary Policy Strategy,Household Inflation Expectations,Randomized Control Trial,Survey Data |
| JEL: | F33 E31 E32 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:172022&r= |