nep-eec New Economics Papers
on European Economics
Issue of 2022‒07‒18
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The macroeconomic and fiscal impact of population ageing By Bodnár, Katalin; Nerlich, Carolin
  2. Risk Sharing and the Adoption of the Euro By Alessandro Ferrari; Anna Rogantini Picco
  3. European Stabilization Policy After the Covid-19 Pandemic: More Flexible Integration or More Federalism? By Andersson, Fredrik N. G.; Jonung, Lars
  4. New facts on consumer price rigidity in the euro area By Gautier, Erwan; Conflitti, Cristina; Faber, Riemer P.; Fabo, Brian; Fadejeva, Ludmila; Jouvanceau, Valentin; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Wieland, Elisabeth; Zimmer, Hélène
  5. Liquidity coverage ratios and monetary policy credit in the time of Corona By Gocheva, Viktoriya; Mudde, Yvo; Tapking, Jens
  6. Greece 2010-18: what could we have done differently? By Lenoël, Cyrille; Macchiarelli, Corrado; Young, Garry
  7. ECB monetary policy and commodity prices By Shahriyar Aliev; Evžen Kočenda
  8. The case of financial and banking integration of Central, Eastern and South Eastern European countries: a gravity model approach By Léonore Raguideau-Hannotin
  9. The perils of Kremlin's influence: evidence from Ukraine By Chiara Natalie Focacci; Mitja Kovac; Rok Spruk
  10. "Density forecasts of inflation using Gaussian process regression models". By Petar Soric; Enric Monte; Salvador Torra; Oscar Claveria
  11. Which crisis support fiscal measures worked during the COVID-19 shock in Europe? By Evi Pappa; Andrey Ramos; Eugenia Vella
  12. Evolution of fiscal systems: Convergence or divergence? By Paloma Péligry; Xavier Ragot
  13. Employment protection and labour productivity growth in the EU: skill-specific effects during and after the Great Recession By Fedotenkov, Igor; Kvedaras, Virmantas; Sanchez-Martinez, Miguel
  14. The Employment Effects of Working Time Reductions: Sector-Level Evidence from European Reforms By Cyprien Batut; Andrea Garnero; Alessandro Tondini
  15. The effect of structural reforms: Do they differ between GDP and adjusted household disposable income? By Jarmila Botev; Balázs Égert; David Turner

  1. By: Bodnár, Katalin; Nerlich, Carolin
    Abstract: The euro area, like many other advanced economies, has entered an era of drastic demographic change. Without appropriate policy responses, population ageing in the euro area is posing formidable challenges for potential growth, monetary policy and public finances. This paper examines – from a central bank’s perspective – the macroeconomic and fiscal effects of population ageing in the euro area and looks at the main challenges ahead in the next decades. Total population in the euro area is projected to decline as of around 2035, while the old-age dependency ratio will rise strongly in the coming 15 years, putting additional burden on pension systems. The analysis in the paper finds that the demographic changes in the euro area present a drag on potential growth, mainly through labour supply and productivity growth – similarly to developments in Japan, which is ahead of the euro area in terms of population ageing. Precautionary savings may be higher, and the natural rate of interest lower, while the effect on trend inflation and wages are not obvious. Population ageing is posing a burden on fiscal policy, through upward pressure on pension spending and adversely affecting the tax bases and the structure of public revenues. Thus, it poses significant challenges for fiscal sustainability, limits fiscal policy space and effectiveness. To safeguard against the adverse economic and fiscal consequences of population ageing, there is a need for fiscal buffers, improved quality of public finance and structural reforms. JEL Classification: E24, E52, E62, J11, J21
    Keywords: euro area, fiscal policy, Japan, labour force, population ageing, potential growth
    Date: 2022–06
  2. By: Alessandro Ferrari; Anna Rogantini Picco
    Abstract: This paper empirically evaluates whether adopting a common currency has changed the level of consumption smoothing of euro area member states. We construct a counterfactual dataset of macroeconomic variables through the synthetic control method. We then use the output variance decomposition of Asdrubali, Sorensen and Yosha (1996) on both the actual and the synthetic data to study if there has been a change in risk sharing and through which channels. We find that the euro adoption has reduced risk sharing and consumption smoothing. We further show that this reduction is mainly driven by the periphery countries of the euro area who have experienced a decrease in risk sharing through private credit.
    Date: 2022–05
  3. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: Crises are a major driving force behind cooperation in the European Union. This holds also for monetary and fiscal policy. During severe crises, cooperation has been enlarged and intensified. The recent covid-19 pandemic is a clear example of this pattern. The pandemic has had huge impact on the conduct of stabilization policies in the EU. Public debt has grown rapidly in many EU member states. The ECB has carried out a highly expansionary monetary policy. In this paper, we discuss the implications for the EU of a move towards increased fiscal federalism following the pandemic. First, the role of crises as a driver of political change is analysed. Next, we examine in greater detail, the effect of crises on the design of stabilisation policies in the EU since the introduction of the euro, the common currency. Finally, we discuss the significance of the recent pandemic-induced steps towards increased federalism for the EU. We raise the question as to whether this is a desirable path for the future of European cooperation.
    Keywords: Monetary policy; fiscal policy; fiscal rules; stabilization policy; European Union; ECB; crises
    JEL: E60 F42 H60
    Date: 2022–06–21
  4. By: Gautier, Erwan; Conflitti, Cristina; Faber, Riemer P.; Fabo, Brian; Fadejeva, Ludmila; Jouvanceau, Valentin; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Wieland, Elisabeth; Zimmer, Hélène
    Abstract: Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks. JEL Classification: D40, E31
    Keywords: consumer prices, inflation, micro data, price rigidity
    Date: 2022–06
  5. By: Gocheva, Viktoriya; Mudde, Yvo; Tapking, Jens
    Abstract: When a bank receives credit from the central bank, its Liquidity Coverage Ratio (LCR) changes. In most cases, the LCR increases. We investigate how this LCR boost from central bank credit affects banks’ behaviour, looking at the euro area during the Corona year 2020. Our theoretical and empirical analyses suggest that banks that get strong LCR boosts from central bank credit tend to take actions that reduce their LCRs. In this sense, banks consume their LCR boosts. In terms of policy conclusions, our analysis suggests that central bank credit operations can provide strong incentives for banks to take actions that reduce their LCRs. Such actions, which could include the provision of additional credit and a shortening of the maturity structure of the liabilities of the banks, plausibly have an impact on the real economy. As such, our analysis reveals what may be called a “LCR channel” of monetary policy transmission. JEL Classification: E52, E58, G28
    Keywords: central bank credit operations, Corona pandemic, Liquidity Coverage Ratio, monetary policy transmission
    Date: 2022–06
  6. By: Lenoël, Cyrille; Macchiarelli, Corrado; Young, Garry
    Abstract: At the beginning of 2010, the fiscal situation of Greece was unsustainable, and an ambitious but costly adjustment plan had to be put in place under a consortium of the International Monetary Fund, the European Commission and the European Central Bank. It took three consecutive adjustment programmes, including debt-relief through private sector involvement, to restore confidence in the economy and achieve a budget surplus. In this paper, we provide a theoretical analysis of the Greek Crisis starting from 2010. We build a series of counterfactuals using the National Institute General Econometric Model (NIGEM) to analyse why the cost of the adjustment in terms of GDP loss and increase in debt-to-GDP ratio turned out to be much worse than expected. In doing so, we analyse three scenarios: (i) one in which we simulate a much more conservative cut in public investment by the Greek central government; (ii) a second scenario of a lower risk-premium, signalling, e.g., lower political and redenomination risks, had the European Central Bank guaranteed its lending of last resort role earlier than 2012; (iii) finally, a similar financial envelope as the one adopted during the first Greek adjustment programme but over a longer period, moving beyond the standard IMF three-year duration programmes. We find that the mix of expenditure cuts and loss of confidence among households and firms explain a large part of the unanticipated costs of the adjustment in the Greek crisis.
    Keywords: fiscal multipliers; fiscal policy; government; public expenditure; public investment; DG-ECFIN
    JEL: E62 E63 H54
    Date: 2022–05
  7. By: Shahriyar Aliev; Evžen Kočenda
    Abstract: We assess the impact of ECB monetary policy on global aggregate and sectoral commodity prices over 2001-2019. We employ a SVAR model and separately assess periods before and after the global financial crisis. Our key results indicate that contractionary monetary policy shocks have positive effects on commodity prices during both conventional and unconventional monetary policy periods, indicating the effectiveness of unconventional monetary policy tools. The largest impact is documented on fuel and food commodities. Our results also suggest that the effect of ECB monetary policy on commodity prices transmits through the exchange rate channel, which influences European market demand.
    Keywords: European Central Bank, commodity prices, short-term interest rates, M2 stock, monetary aggregate, unconventional monetary policy, Structural Vector Autoregressive model, exchange rates
    JEL: C54 E43 E58 F31 G15 Q02
    Date: 2022–06–21
  8. By: Léonore Raguideau-Hannotin (Université Paris Nanterre)
    Abstract: The motivation of this article is to better understand the determinants of international banking integration of non-Euro CESEE EU Members. One stylized fact for these economies is the building up of external financial vulnerabilities since the beginning of the Transition period, with a large weight of cross-border banking,particularly with the European Union. In relation with the literature on the impact of gross financial flows on financial stability, we therefore estimate the long-term historical, geographical and cultural determinants of cross-border banking claims with a bilateral financial gravity model. We then analyze the impact of domestic(pull), foreign (push) and global factors using the gravity framework. Our results first show that cross-border banking in these economies is significantly driven by geographical proximity and common historical links, particularly with EU Member States. Second, we find that banking sector health variables are more significant as push factors, while structural banking system variables are more significant as pull factors. These results provide evidence in favor of an impact of European banking systems on financial liabilities in this region, in relation with the very high level of EU ownership of banking assets. Finally, US global liquidity factor matters more than exchange rate stability, which points towards policy dilemma effect in the region.
    Keywords: Gravity model, cross-border banking, Central Eastern and South EasternEuropean countries, European Union, push factors
    JEL: F
    Date: 2022
  9. By: Chiara Natalie Focacci; Mitja Kovac; Rok Spruk
    Abstract: We examine the contribution of institutional integration to the institutional quality. To this end, we exploit the 2007 political crisis in Ukraine and examine the effects of staying out of the European Union for 28 Ukrainian provinces in the period 1996-2020. We construct novel subnational estimates of institutional quality for Ukraine and central and eastern European countries based on the latent residual component extraction of institutional quality from the existing governance indicators by making use of Bayesian posterior analysis under non-informative objective prior function. By comparing the residualized institutional quality trajectories of Ukrainian provinces with their central and eastern European peers that were admitted to the European Union in 2004 and after, we assess the institutional quality cost of being under Russian political influence and interference. Based on the large-scale synthetic control analysis, we find evidence of large-scale negative institutional quality effects of staying out of the European Union such as heightened political instability and rampant deterioration of the rule of law and control of corruption. Statistical significance of the estimated effects is evaluated across a comprehensive placebo simulation with more than 34 billion placebo averages for each institutional quality outcome.
    Date: 2022–06
  10. By: Petar Soric (Faculty of Economics & Business University of Zagreb.); Enric Monte (Department of Signal Theory and Communications, Polytechnic University of Catalunya (UPC).); Salvador Torra (Riskcenter–IREA, University of Barcelona (UB).); Oscar Claveria (AQR–IREA, University of Barcelona (UB).)
    Abstract: The present study uses Gaussian Process regression models for generating density forecasts of inflation within the New Keynesian Phillips curve (NKPC) framework. The NKPC is a structural model of inflation dynamics in which we include the output gap, inflation expectations, fuel world prices and money market interest rates as predictors. We estimate country-specific time series models for the 19 Euro Area (EA) countries. As opposed to other machine learning models, Gaussian Process regression allows estimating confidence intervals for the predictions. The performance of the proposed model is assessed in a one-step-ahead forecasting exercise. The results obtained point out the recent inflationary pressures and show the potential of Gaussian Process regression for forecasting purposes.
    Keywords: Machine learning, Gaussian process regression, Time-series analysis, Economic forecasting, Inflation, New Keynesian Phillips curve. JEL classification: C45, C51, C53, E31.
    Date: 2022–07
  11. By: Evi Pappa; Andrey Ramos; Eugenia Vella
    Abstract: We build a new database by classifying the COVID-19 fiscal measures for twelve EU countries into seven spending categories and examine how the different support packages affected the economy. On average, fiscal measures supported the output recovery without generating significant inflationary pressures. This finding masks substantial heterogeneity: Assistance to small and medium enterprises and specific sectors contributed significantly to stimulating the economy and to maintaining inflation. Direct pandemic spending and unemployment benefits and measures to sustain employment levels generated sizeable output multipliers and had no inflationary costs. Conversely, universal help only had positive effects on inflation and transfers to households did not do much apart from affecting confidence.
    Keywords: COVID-19 crisis, fiscal measures, multipliers, sentiment, transfers, assistance to SMEs, inflation
    JEL: C23 E62
    Date: 2022–07–01
  12. By: Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this article is to analyze, more than ten years after the financial crisis of 2007, the convergence or divergence of the diversity of capitalism, focusing on the fiscal systems. Studying 29 countries, we first analyse the evolution of the taxation of households, firms, labour, consumption and capital. Then we use recent statistical method to indentify three types of fiscal systems: liberal, intermediate, and social-democratic, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. The first result of this analysis is that only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates, on labour or capital tax on households, show rather signs of divergence. Second, we show the divergence of the liberal and social-democratic group over the period. The European countries are converging towards the social-democratic model, with the exception of Great Britain, which is moving towards the liberal model over the period. Hence, the analysis shows that the divergence of fiscal systems is compatible with the convergence of certain taxes on the most mobile factors during a strong period of trade internationalization. Thus, the financial crisis does not seem to contribute to the convergence, but to the divergence of fiscal systems.
    Keywords: fiscal systems,globalization,capital taxation
    Date: 2022–02–03
  13. By: Fedotenkov, Igor (European Commission); Kvedaras, Virmantas (European Commission); Sanchez-Martinez, Miguel (European Commission)
    Abstract: The paper investigates the relationship between employment protection legislation (EPL hereafter) and labour productivity growth in the EU in the context of the Great Recession. We consider the crisis and recovery periods, evaluate the relevance of both levels and changes in EPL for productivity growth, establish the presence of some nonlinearities, and explore the conditioning role played by the skills of the labour force, captured by different levels of education. We find that stricter labour protection reduces labour productivity growth in sectors with a large share of workers with tertiary education, whereas this effect is negligible or positive in sectors where workers with secondary or only primary education are more prevalent, respectively. We establish that overly strict regulation is more harmful, whereas its moderate level can be even beneficial in regular (non-crisis) times. In the long run, we document that an increase in EPL stimulates employers to substitute labour with capital, partially mitigating the overall negative effect on labour productivity growth. We provide several hypotheses that could explain our findings and discuss potential policy implications supported by a back-of-the-envelope calculation.
    Keywords: Labour productivity, employment protection legislation, skills, education, Great Recession
    JEL: E24 I25 J24 J88
    Date: 2022–05
  14. By: Cyprien Batut; Andrea Garnero; Alessandro Tondini
    Abstract: Working time legislation is a key labour market regulation and the subject of heated and recurrent debates. A first-order concern is how this legislation may impact employment. In this paper, we exploit a panel of industry-level data in European countries to study the economic impact of national reductions in usual weekly working hours between 1995 and 2007. Our identification strategy relies on the five national reforms that took place over this period and on initial differences across sectors in the share of workers exposed to the reforms. We show that, on average, the number of hours worked in more affected sectors fell relative to less affected sectors but employment did not increase, while the impact on wages and value-added per hour worked appears to be positive but insignificant.
    Keywords: working time, work sharing, employment, wages, value-added
    JEL: J20 J30 J80
    Date: 2022–06
  15. By: Jarmila Botev; Balázs Égert; David Turner
    Abstract: The paper considers whether structural reforms have a different impact on adjusted household disposable income (AHDI) compared to GDP, particularly given that while the latter is currently used as the basis for the OECD Economics Department’s framework for evaluating the effect of structural policy reforms, the former is arguably a better measure of welfare. The main findings are that there are indeed a number of structural policies where the long-run effects on GDP and AHDI are proportionately different, so that percentage changes in the two aggregates are significantly different following a policy reform. One group of structural policies, typically those where the transmission mechanism depends mainly on productivity and capital intensity (including cuts in corporate income tax and policies to simulate business R&D) or which can weaken the bargaining power of labour (for example a loosening of EPL), have weaker long-run positive effects on AHDI than GDP. Other structural reform policies (including in-kind family benefits, family cash benefits and cuts in the income tax wedge) have a magnified effect on AHDI, so that following a policy reform, long-run percentage changes in AHDI are larger than for GDP. Cross-referencing the analysis in the paper with structural reform priorities previously identified in the OECD’s regular Going for Growth surveillance exercise, suggests that increased spending on childcare and early childhood education might usefully be part of any policy package to address the ‘cost of living crisis’ currently being faced by many OECD households.
    Keywords: childcare, early childhood education, employment, Household disposable income, in-kind family benefits, productivity, structural reforms, tax wedge
    JEL: D24 E17 E24 E25 J08
    Date: 2022–06–22

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