nep-eec New Economics Papers
on European Economics
Issue of 2022‒08‒29
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The economic impact of the NPLcoverage expectations in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
  2. The Term Structure of Interest Rates in a Heterogeneous Monetary Union By James Costain; Galo Nuño; Carlos Thomas
  3. Monetary Union, Asymmetric Recession, and Exit By Keuschnigg, Christian
  4. Shadow Rates as a Measure of the Monetary Policy Stance: Some International Evidence By Christina Anderl; Guglielmo Maria Caporale
  5. Investor Base Dynamics and Sovereign Bond Yied Volatility By Carlos Alberto Piscarreta Pinto Ferreira
  6. Fiscal and macroprudential policies in a monetary union By Jose E Bosca; Javier Ferri; Margarita Rubio
  7. R&D Tax Credits across the European Union: Divergences and convergence By Stéphane Robin; Laurence Jacquet
  8. The relationship between shipping freight rates and inflation in the Euro Area By Nektarios A. Michail; Konstantinos D. Melas; Lena Cleanthous
  9. Output Losses in Europe During COVID-19: What Role for Policies? By Mr. Anil Ari; Jean-Marc B. Atsebi; Mar Domenech Palacios
  10. The Covid-19 Pandemic and European Trade Flows: Evidence from a Dynamic Panel Model By Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
  11. Global combinations of expert forecasts By Qian, Yilin; Thompson, Ryan; Vasnev, Andrey L
  12. The effects of demographic dynamics on economic growth in EU economies: A panel vector autoregressive approach By Taguchi, Hiroyuki; Latjin, Mirani
  13. Heterogeneous effects and spillovers of macroprudential policy in an agent-based model of the UK housing market By Adrián Carro; Marc Hinterschweiger; Arzu Uluc; J. Doyne Farmer
  14. The role of wage bargaining institutions in the Phillips curve flattening; By De Palma Francesco; Ligonnière Samuel; Saadaoui Jamel; Thommen Yann
  15. Why is Finland lagging behind in export growth? By Oinonena, Sami; Virén, Matti E. E.

  1. By: Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper looks at the macroeconomic impact of the two policies proposed by ECB Banking Supervision to tackle the high share of non-performing loans (NPLs) on the balance sheets of euro area banks. The first is the coverage expectations for new NPLs set out in the Addendum to the ECB’s NPL Guidance, which aim to prevent the build-up of new NPLs, and the second is the coverage expectations for legacy NPLs, which target the reduction of already existing stocks of NPLs. The impact assessment of the package is analysed via a semi-structural model, the Banking Euro Area Stress Test (BEAST). The coverage expectations for NPLs are found to be effective in reducing banks’ NPLs. The phase-in of the policies can temporarily reduce bank profitability owing to increased loan loss provisioning targets. However, over a longer time horizon, lower NPL ratios reduce uncertainty and enable banks to access cheaper funding in the markets, ultimately benefiting lending and output growth. Furthermore, the coverage expectations can also moderately but persistently reduce procyclicality in the banking system. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, impact assessment, loan loss provisions, Non-performing loans, real-financial feedback mechanism, regulatory policy
    Date: 2022–07
  2. By: James Costain (Banco de España); Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: The highly asymmetric reaction of euro area yield curves to the announcement of the ECB’s pandemic emergency purchase programme (PEPP) is hard to reconcile with the standard “duration risk extraction” view of the transmission of central banks’ asset purchase policies. This observation motivates us to build a no-arbitrage model of the term structure of sovereign interest rates in a two-country monetary union, in which one country issues default-free bonds and the other issues defaultable bonds. We derive an affine term structure solution, and we decompose yields into term premium and credit risk components. In an extension, we endogenise the peripheral default probability, showing that the possibility of rollover crises makes it an increasing function of bond supply net of central bank holdings. We calibrate the model to Germany and Italy, showing that it matches well the reaction of these countries’ yield curves to the PEPP announcement. A channel we call “default risk extraction” accounts for most of the impact on Italian yields. The programme’s flexible design substantially enhanced this impact.
    Keywords: sovereign default, quantitative easing, yield curve, affine model, COVID-19 crisis, ECB, pandemic emergency purchase programme
    JEL: E5 G12 F45
    Date: 2022–06
  3. By: Keuschnigg, Christian
    Abstract: We propose a New Keynesian DSGE model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
    Keywords: Currency union, exchange rate flexibility, fiscal consolidation, sovereign debt, banks
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2022–08
  4. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper examines the usefulness of shadow rates to measure the monetary policy stance by comparing them to the official policy rates and those implied by three types of Taylor rules in both inflation targeting countries (the UK, Canada, Australia and New Zealand) and others that have only targeted inflation at times (the US, Japan, the Euro Area and Switzerland) over the period from the early 1990s to December 2021. Shadow rates estimated from a dynamic factor model are shown to suggest a much looser policy stance than either the official policy rates or those implied by the Taylor rules, and generally to provide a more accurate picture of the monetary policy stance during both ZLB and non-ZLB periods, since they reflect the full range of unconventional policy measures used by central banks. Further, generalised impulse response analysis based on two alternative Vector Autoregression (VAR) models indicates that monetary shocks based on the shadow rates are more informative than those related to the official policy rates, especially during the Global Financial Crisis and the recent Covid-19 pandemic, when unconventional measures have been adopted.
    Keywords: dynamic factor models, shadow rates, inflation targeting, monetary policy stance
    JEL: C38 E43 E52 E58
    Date: 2022
  5. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: We assess the role of investor base dynamics in explaining sovereign bond yield volatility in a broad number of advanced economies, adding to previous work by investigating the role of both foreign and domestic non-official investors and using local projections to parsimoniously address endogeneity among variables. Our results show that buying and selling have differentiated impacts on volatility. Foreign investors contribute to increase bond yield volatility, mostly through net sales. Domestic investors’ net purchases may help to shield the sovereign issuer against volatility even if their dampening effect is not instantaneously felt or indeed is only observable in the more crucial context of rising yields. The Euro Area, split in two groups of countries that do not respond uniformly to foreign net sales nor enjoy the same level of protection from domestic net purchases, seems vulnerable requiring, from a policy point of view, vigilance, and protection against fragmentation risks.
    Date: 2022–07
  6. By: Jose E Bosca; Javier Ferri; Margarita Rubio
    Abstract: In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, fiscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global financial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing financial risks. This issue gives rise to an interesting research question: how do macroprudential and fiscal policies interact? By affecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a fiscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder financial effects and also influences the foreign country fiscal stance. Moreover, a discretionary government spending policy affects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the fiscal multiplier.
    Keywords: Monetary union, macroprudential policy, fiscal policy, monetary policy
    Date: 2022
  7. By: Stéphane Robin (UP1 - Université Paris 1 Panthéon-Sorbonne, THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Laurence Jacquet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: We examine the R&D, innovation and productivity effects of R&D tax credits (R&DTC) in 8 EU countries, in the context of a proposed EU-wide "super deduction" on R&D expenditures. Our econometric analysis, performed on industry-level panel data, shows that past R&D feeds current R&D, whether it is conducted under an R&DTC or not. Our estimate of additionality during an R&DTC phase is generally close to 1. R&D intensity also affects patenting intensity positively in Belgium, Czech Republic, France, Spain and the UK, but this relationship is R&DTC-related only in Belgium, France and Spain. Only in France and the UK do we observe a full (yet fragile) R&D-innovation-productivity relationship. In the UK, this relationship is not affected by the R&DTC scheme. In France, a 1% increase in R&D conducted under the second to fourth phases of R&DTC (1999-2017) entails a cumulated 0.37% increase in patenting intensity, which translates to a 0.16% increase in productivity. The main policy implication of these results is that a "super-deduction" on R&D is likely to help the EU reach its "R&D at 3% of GDP" objective, but only time will tell how generous it must be to really spur innovation and productivity.
    Keywords: R&D Tax Credits,Public Support to R&D,Science and Technology Policy,European Policy JEL codes: O38,H25,H54
    Date: 2022–05–30
  8. By: Nektarios A. Michail (Central Bank of Cyprus); Konstantinos D. Melas (Metropolitan College, Greece and University of Western Macedonia, Kastoria, Greece); Lena Cleanthous (Central Bank of Cyprus)
    Abstract: Consumer inflation across the globe has rebounded during 2021, also as a result of supply side disruptions, one of which is the increase in freight costs. To elaborate on the relationship between inflation and shipping costs, we employ a Vector Error Correction Model (VECM) and use disaggregated monthly data from January 2009 to August 2021, using both constant tax and the standard price indices. Following a shock in freight rates, the most hard-hit sectors appear to be garments and major household appliances, items that have traditionally been manufactured outside the euro area. In addition, using a threshold regression methodology we show that when freight rates rise more than $1,300-$1,500 per day, the sensitivity of inflation to freight changes increases.
    Keywords: inflation, shipping, freight rates, supply shock
    JEL: E31 R4
    Date: 2022–07
  9. By: Mr. Anil Ari; Jean-Marc B. Atsebi; Mar Domenech Palacios
    Abstract: We use a decomposition methodology to analyze the factors underlying the differentiated output losses of European countries in 2020. Our findings are fourfold: First, 2020 growth outcomes can be explained by differences in mobility, underlying growth trends, and pre-pandemic country fundamentals. Second, fiscal and monetary policies helped alleviate output losses during the pandemic in all European countries but to a varying extent. Third, shallower recessions in emerging market economies in Europe can be attributed to higher underlying growth and younger populations. Fourth, fiscal multipliers were higher in countries where above-the-line measures accounted for a larger share of the total fiscal package, the size of the total fiscal package was smaller, and inequality and informality were greater, as well as in countries with IMF-supported program during the pandemic.
    Keywords: COVID-19 crisis; output losses; monetary policy; fiscal policy; fiscal multipliers; growth outcome; output loss; decomposition methodology; types of fiscal policies; monetary policy support; COVID-19; Central bank policy rate; Income inequality; Europe; Global
    Date: 2022–07–01
  10. By: Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
    Abstract: This paper investigates the impact of the Covid-19 pandemic on trade flows in the case of the European countries. First, an ARDL dynamic panel model is estimated using the PMG method to analyse monthly data covering the most recent period (2019M1-2021M12); then, the GMM and PCSE approaches are applied to a much longer span of quarterly data (2000Q1-2021Q4), which also includes the Global Financial Crisis (GFC) of 2007-2009, in order to compare the trade impact of two different crises. The findings based on the monthly data provide clear evidence of the significant negative effects of the Covid-19 pandemic on both exports and imports in both the short and the long run, and also suggest that digitalization was instrumental in mitigating the impact of the crisis and speeding up the recovery. The quarterly analysis over a longer time period indicates that both the GCF and the Covid-19 pandemic had negative effects on trade but of a different magnitude. The use of digital technology enabling remote work and e-commerce are again some of the factors likely explaining why international trade fell by less and also rebounded much more quickly during the Covid-19 pandemic compared to the GFC.
    Keywords: Covid-19 pandemic, trade flows, dynamic panel models, pooled mean group (PMG) estimator
    JEL: C25 E61 F13 F15
    Date: 2022
  11. By: Qian, Yilin; Thompson, Ryan; Vasnev, Andrey L
    Abstract: Expert forecast combination—the aggregation of individual forecasts from multiple subject matter experts— is a proven approach to economic forecasting. To date, research in this area has exclusively concentrated on local combination methods, which handle separate but related forecasting tasks in isolation. Yet, it has been known for over two decades in the machine learning community that global methods, which exploit taskrelatedness, can improve on local methods that ignore it. Motivated by the possibility for improvement, this paper introduces a framework for globally combining expert forecasts. Through our framework, we develop global versions of several existing forecast combinations. To evaluate the efficacy of these new global forecast combinations, we conduct extensive comparisons using synthetic and real data. Our real data comparisons, which involve expert forecasts of core economic indicators in the Eurozone, are the first empirical evidence that the accuracy of global combinations of expert forecasts can surpass local combinations.
    Keywords: Forecast combination, local forecasting, global forecasting, multi-task learning, European Central Bank, Survey of Professional Forecasters
    Date: 2022–07–29
  12. By: Taguchi, Hiroyuki; Latjin, Mirani
    Abstract: This study estimates the effects of demographic dynamics on economic growth, with a focus on the working-age population and life expectancy in 19 European Union economies for 1970–2020 and 2020–2050, using a panel vector autoregressive (PVAR) model as the analytical methodology. The main findings are as follows. First, the PVAR estimation identifies positive effects of the growth of the working-age population share and the extension of life expectancy on economic growth. Second, the contribution ratio of the demographic effects to economic growth for past population bonus periods is approximately 15% on average in this study, which is comparable to the ratios found in previous studies. Third, the projection for 2020–2050 shows that the magnitude of the negative demographic effect on annual economic growth due to the population onus is -0.385 on average among all sample economies. The main policy implication of this study is that the EU economies that have already entered the population onus phase of the demographic transition need to mitigate the negative effects of the decline in the working-age population share.
    Keywords: demographic dynamics, economic growth, European Union, working-age population, life expectancy, panel vector autoregressive model
    JEL: J11 O52
    Date: 2022
  13. By: Adrián Carro (Banco de España and University of Oxford); Marc Hinterschweiger (Bank of England); Arzu Uluc (Bank of England); J. Doyne Farmer (University of Oxford and Santa Fe Institute (New Mexico))
    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 modelling, housing market, rental market, macroprudential policy, borrower-based measures
    JEL: D1 D31 E58 G51 R21 R31
    Date: 2022–05
  14. By: De Palma Francesco; Ligonnière Samuel; Saadaoui Jamel; Thommen Yann
    Abstract: We investigate the role of collective wage bargaining institutions on the relationship between wage growth and unemployment, that is, the wage Phillips curve. Based on a labour market model with frictions and collective bargaining, we hypothesize that when the economy deteriorates, wages fall less in parts of the economy covered by collective wage agreements negotiated by trade unions at a centralized level than in economies with bargaining fully decentralized within companies. We move from theory to empirical analysis using regional NUTS-2 data from European countries, which show evidence that the wage Phillips curve flattens when unemployment is high—and gets steeper when the labor market is overheated —, in economies where the sectoral or cross-sectoral levels play a role in the collective wage bargaining. We also find that from a level of centralization intermediate between the company and the sector levels, the wage Phillips curve is twice as flat.
    Keywords: Phillips curve, Unemployment, Inflation, Wages, Collective bargaining.
    JEL: E24 E31 E32 J50
    Date: 2022
  15. By: Oinonena, Sami; Virén, Matti E. E.
    Abstract: This paper tries to find an answer to the question of why has Finnish exports performed so poorly during the last two decades. It also tries to assess the related question of why is the level of openness of the Finnish economy much lower than in neighboring countries and countries with similar size and structural features of the economy. The market share analysis shows that Finnish export performance has suffered from unfavorable structure of markets and commodities in particular during the last ten years. The quality of exports has also deteriorated over time so that the share of raw materials and intermediate goods has grown. This has had unfavorable implications on export prices and the terms of trade.
    Keywords: export performance,export market share,gravitation model
    JEL: F14 F43 F62
    Date: 2022

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