nep-eec New Economics Papers
on European Economics
Issue of 2022‒09‒19
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. DSGE Models and Machine Learning: An Application to Monetary Policy in the Euro Area By Daniel Stempel; Johannes Zahner
  2. Public finances solvency in the Euro Area: true or false? By António Afonso; José Carlos Coelho
  3. Estimating the Euro Area output gap using multivariate information and addressing the COVID-19 pandemic By Morley, James; Palenzuela, Diego Rodriguez; Sun, Yiqiao; Wong, Benjamin
  4. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
  5. Short-Time Work schemes and labour market flows in Europe during COVID By Cristina Lafuente and Astrid Ruland
  6. Bringing Them In or Pushing Them Out? The Labor Market Effects of Pro-cyclical Unemployment Assistance Changes By Gerard Domènech-Arumí; Silvia Vannutelli
  7. Disparities in Labour Market and Income Trends during the First Year of the COVID-19 Crisis – Evidence from Germany By Braband, Carsten; Consiglio, Valentina Sara; Grabka, Markus M.; Hainbach, Natascha; Königs, Sebastian
  8. Financial implications of the EU Emission Trading System: an analysis of wavelet coherence and volatility spillovers By Pietro De Ponti; Matteo Romagnoli

  1. By: Daniel Stempel (University of Duesseldorf); Johannes Zahner (University of Marburg)
    Abstract: In the euro area, monetary policy is conducted by a single central bank for 19 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. We find that a neural network performs best out-of-sample. Thus, we use this algorithm to classify historical EMU data. Our findings suggest disproportional emphasis on the inflation rates experienced by southern EMU members for the vast majority of the time frame considered (80%). We argue that this result stems from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
    Keywords: New Keynesian Models, Monetary Policy, European Monetary Union, Neural Networks, Transfer Learning
    JEL: C45 C53 E58
    Date: 2022
  2. By: António Afonso; José Carlos Coelho
    Abstract: We assess public finances solvency for Euro Area countries using quarterly data between 1999Q1 and 2020Q4. Through a country-by-country analysis, the answer to the title question is true. For most countries, (i) the primary budget balance reacts positively to the lagged public debt ratio and past primary government balances contribute to the reduction of the public debt ratio, indicating a Ricardian fiscal regime. Furthermore, in a panel framework: (ii) the response of revenues to government expenditures is higher from 2010 onwards, and, for higher average public debt ratios, the response is lower, while (iii) the response of the primary government balance to the lagged public debt ratio is lower from 2010 onwards and is higher for higher average public debt ratios; (iv) past primary budget balances allow the public debt ratio to be reduced, especially before 2010 and in countries whose average public debt ratio is between 60 and 90% of GDP. Using a rolling window method, we find that (v) fiscal sustainability coefficients are higher the higher the lagged public debt ratios, fiscal rule indexes and sovereign ratings. Conversely, after 2010 and in periods of legislative elections, those coefficients are lower.
    Keywords: fiscal sustainability; primary budget balance; public debt; panel data; rolling windows; Euro Area; quarterly fiscal data
    JEL: C23 H61 H63 E62
    Date: 2022–09
  3. By: Morley, James; Palenzuela, Diego Rodriguez; Sun, Yiqiao; Wong, Benjamin
    Abstract: We estimate the euro area output gap by applying the Beveridge-Nelson decomposition based on a large Bayesian vector autoregression. Our approach incorporates multivariate information through the inclusion of a wide range of variables in the analysis and addresses data issues associated with the COVID-19 pandemic. The estimated output gap lines up well with the CEPR chronology of the business cycle for the euro area and we find that hours worked, more than the unemployment rate, provides the key source of information about labor utilization in the economy, especially in pinning down the depth of the output gap during the COVID-19 recession when the unemployment rate rose only moderately. Our findings suggest that labor market adjustments to the business cycle in the euro area occur more through the intensive, rather than extensive, margin. JEL Classification: C18, E17, E32
    Keywords: Bayesian estimation, Beveridge-Nelson decomposition, multivariate information, output gap
    Date: 2022–08
  4. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
    Abstract: Despite a formal 'no-bailout clause; we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a 'Southern view' of the crisis (transfers did not help) and a 'Northern view' (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of 'kicking the can down the road.' Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
    Keywords: Euro area; Monetary union; Sovereign debt; Sovereign default; Debt monetization
    JEL: F34 F45 G15
    Date: 2022–08–03
  5. By: Cristina Lafuente and Astrid Ruland
    Abstract: In this paper we investigate the impact that Short-Time Work schemes (STWs) had on employment and labour market flows during the COVID emergency of 2020 in four of the five largest economies of the EU. Most European countries used STWs at this time to alleviate the negative impact of sanitary measures like lockdowns. Looking at labour market stocks and flows, we document that these schemes were widely adopted and likely prevented substantial job losses. However, they failed to protect temporary workers. Moreover, in all countries, transitions from employment to non-participation reached unprecedented levels. These flows are reverted in subsequent quarters, which implies that many workers postponed job search during the lockdown. We do not observe permanent increases in non-participation, but we document a large fall in flows between temporary and permanent jobs. We interpret this as a drop in labour market mobility. We find that vacancy posting and firm dynamics may be able to explain part of the observed differences between countries.
    Keywords: labour market flows; short-time work; inactivity; labour force survey
    JEL: C82 E24 J21 J60
    Date: 2022
  6. By: Gerard Domènech-Arumí; Silvia Vannutelli
    Abstract: We exploit an unanticipated labor market reform in 2012 Spain to estimate the effects of pro-cyclical changes in long-term unemployment assistance (UA). The reform raised the minimum age to receive unlimited-duration UA from 52 to 55. Using a dfference-in-differences design, we document that shorter benefits caused (i) shorter non-employment duration, especially among younger workers; (ii) higher labor force exit and other programs' take-up, especially among older workers; (iii) lower reemployment wages. The reform induced moderate government savings. Our results highlight how considering the interplay with labor market conditions is crucial when designing long-term beneffit schedules affecting workers close to retirement.
    Keywords: Unemployment, Unemployment Insurance, Wages
    Date: 2022–07
  7. By: Braband, Carsten (Humboldt University Berlin); Consiglio, Valentina Sara (University of Konstanz); Grabka, Markus M. (DIW Berlin); Hainbach, Natascha (Bertelsmann Stiftung); Königs, Sebastian (OECD)
    Abstract: This paper studies inequalities in labour market outcomes, incomes and economic concerns across workers in Germany during the first year of the COVID-19 crisis using SOEP-CoV data. It shows that, overall, the self-employed and disadvantaged groups of workers were more severely affected by the crisis, including part-time workers and workers in marginal employment (Minijobs), low-educated and low-income workers, and to some extent women. Short-time work (Kurzarbeit), one of the central pillars of Germany's policy response to the crisis, prevented a further widening of labour market inequalities. In spite of the widespread use of Kurzarbeit, about one-in-five low-income workers who had been employed in 2019 were out of work in January/February 2021. This reflects that a higher share of low-income workers had been on part-time contracts and in Minijobs, and had lower capacity to work from home.
    Keywords: SOEP-CoV, COVID-19, Corona, labour market, concerns
    JEL: D19 D39 I39 J21
    Date: 2022–08
  8. By: Pietro De Ponti (Department of Economics, Management and Statistics, University of Milano-Bicocca); Matteo Romagnoli (Department of Economics, Management and Statistics, University of Milano-Bicocca)
    Abstract: We study the European Union’s Emission Trading System (EU ETS) from a financial perspective. Using ARMA-eGARCH filtered volatilities, we first discuss the evolution of the volatility of EU ETS allowances’ returns from 2008 to 2021. Second, we study the degree of co-movement and interdependence between the EU ETS returns’ volatility and those of 37 large companies in industries subject to the System; to this end, we employ Wavelet Coherence and Volatility Spillovers Analyses. Despite spotting seasons of co-movement between volatilities in the markets under consideration, the market performances of the companies in our sample are not particularly responsive to the EU ETS dynamics, except for temporary seasons of interconnection in correspondence of relevant policy changes.
    Keywords: EU Emission Trading System, volatility spillovers, wavelet coherence
    JEL: C22 G11 Q58
    Date: 2022–08

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